(Question 6)(LA Jear, CAPM) (Normal, Delete, WILD) L.A.Jear Inc. makes air shoes that sell at $50...

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(Question 6)(LA Jear, CAPM) (Normal, Delete, WILD) L.A.Jear Inc. makes air shoes that sell at $50 each and cost $30 each to manufacture. Their existing plant produces 1000 shoes per year, which represents a significant part of the total market. They are considering investing in a new plant that will increase their capacity by 500 additional units. When the increased volume of production hits the market, the market price of shoe is expected to fall to $45. L.A.Jear is currently negotiating contracts for the construction of its new plant, which will reduce production costs to $20 each. This project has beta of 4, r(m) is 10% and the interest rate is 5%. (a) What is the cost of capital for this project?(CAPM) (b) What is the maximum price that L.A.Jear should be prepared to pay for its new plant(i.e. Present Value), assuming that it can expect to retain a monopoly of the more efficient production technology indefinitely (forever)? (Hint: consider potential loss(?) from old machine by adopting new machine) (c) What would the new plant be worth to another company that did not already produce air shoes? (Question 6)(LA Jear, CAPM) (Normal, Delete, WILD) L.A.Jear Inc. makes air shoes that sell at $50 each and cost $30 each to manufacture. Their existing plant produces 1000 shoes per year, which represents a significant part of the total market. They are considering investing in a new plant that will increase their capacity by 500 additional units. When the increased volume of production hits the market, the market price of shoe is expected to fall to $45. L.A.Jear is currently negotiating contracts for the construction of its new plant, which will reduce production costs to $20 each. This project has beta of 4, r(m) is 10% and the interest rate is 5%. (a) What is the cost of capital for this project?(CAPM) (b) What is the maximum price that L.A.Jear should be prepared to pay for its new plant(i.e. Present Value), assuming that it can expect to retain a monopoly of the more efficient production technology indefinitely (forever)? (Hint: consider potential loss(?) from old machine by adopting new machine) (c) What would the new plant be worth to another company that did not already produce air shoes?

Answer rating: 100% (QA)

a To calculate the cost of capital for this project using the Capital Asset Pricing Model CAPM we need to use the following formula Cost of Capital Ri... View the full answer