The SSR Co., currently all-equity firm, is planning to build a factory. The beta, systematic risk, of this project alone is 15% less than they currently manage. The beta of the assets currently managed is 1.5. The corporate tax rate the firm faces is 34%. The company has a target debt-to-equity ratio of 3/7. The initial investment cost is $30 million and the expected operating after-tax cash flows are $10 million per year for five years. The risk-free rate is 3% and the historical market risk premium of 8% is a reasonable estimate.

a. What is the all-equity value of this investment?

b. If the company finances it with a five-year non-amortizing loan with 11% interest, should it accept the project (USE APV approach)?

c. If the local government approaches the SSR Co. with an offer to loan the needed amount in b at 8%, should the company accept this offer?

Answer rating: 100% (QA)

answer a Equity investment is the munt invested by investrs in the shres f mnies tht re ublily trded ... View the full answer