Your friend is looking to launch a new hotel chain, Roxy Inc., designed to serve the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Your friend is looking to launch a new hotel chain, Roxy Inc., designed to serve the traveling needs of the budget-minded millennial traveler. To launch Roxy Inc., she is expected to invest $500 million this year (year=0). The hotel chain is expected to generate free cash flows of $27 million per year, starting in year 1. Thereafter, these free cash-flows are expected to grow at 3 percent per year in perpetuity. For simplicity, assume these cash-flows are received at the end of each year. Your friend knows you've been taking this class, so she asked you to assess the potential value of the new hotel chain. To help you, she gives you the following reports for a handful of publicly-traded firms, as well as the expected returns on the government bond (Treasury), and the risk premium on the value-weighted market portfolio: Market Company Dropbox Ikea Intercontinental Hotels Group 10-year Treasury rate Expected Market Risk Premium Value Equity 900 1,000 7,500 [SHOW YOUR WORKING] 2.0% 5.0% Market of Value Debt 150 100 2,500 of Equity Beta 2 2.3 1.6 Assume throughout that the CAPM holds for all assets, and that the debt of Dropbox, Ikea, and Intercontinental Hotel Group is risk-free. None of these firms hold (excess) cash assets. (a) If Roxy Inc. were to be 100% equity financed, what would be a reasonable estimate of the expected return on Roxy's equity? What is Roxy's WACC? [10 marks] The expected return on equity is: Roxy's WACC is: (b) What is the value of Roxy Inc.? Is the project worth pursuing? [10 marks] The estimated value of Roxy Inc. is: The estimated gain to your friend from investing in Roxy's Inc. is: Is the investment worth pursuing (Yes/No) [SHOW YOUR WORKING] (c) Assume now that the new hotel chain is financed instead with a debt-to-value ratio of 25%, and that this leverage ratio is not expected to change over time. What is Roxy's WACC? What is its cost of equity? What is the value of Roxy? In this part, assume that the debt issued is risk-free and that there are no frictions in financial markets (no taxes, bankruptcy costs, etc). [10 marks] Roxy's WACC with leverage is: Roxy's return on equity: The value of Roxy Inc. is now: Is the investment worth pursuing (Yes/No). [SHOW YOUR WORKING] (d) After you complete your analysis in part (c), you learn that Roxy does actually pay a corporate tax of 35%. Describe the effect of corporate taxes on (i) Roxy's WACC and (ii) Roxy's expected value. [10 marks] Roxy's WACC is: [SHOW YOUR WORKING] Roxy's value is: Your friend is looking to launch a new hotel chain, Roxy Inc., designed to serve the traveling needs of the budget-minded millennial traveler. To launch Roxy Inc., she is expected to invest $500 million this year (year=0). The hotel chain is expected to generate free cash flows of $27 million per year, starting in year 1. Thereafter, these free cash-flows are expected to grow at 3 percent per year in perpetuity. For simplicity, assume these cash-flows are received at the end of each year. Your friend knows you've been taking this class, so she asked you to assess the potential value of the new hotel chain. To help you, she gives you the following reports for a handful of publicly-traded firms, as well as the expected returns on the government bond (Treasury), and the risk premium on the value-weighted market portfolio: Market Company Dropbox Ikea Intercontinental Hotels Group 10-year Treasury rate Expected Market Risk Premium Value Equity 900 1,000 7,500 [SHOW YOUR WORKING] 2.0% 5.0% Market of Value Debt 150 100 2,500 of Equity Beta 2 2.3 1.6 Assume throughout that the CAPM holds for all assets, and that the debt of Dropbox, Ikea, and Intercontinental Hotel Group is risk-free. None of these firms hold (excess) cash assets. (a) If Roxy Inc. were to be 100% equity financed, what would be a reasonable estimate of the expected return on Roxy's equity? What is Roxy's WACC? [10 marks] The expected return on equity is: Roxy's WACC is: (b) What is the value of Roxy Inc.? Is the project worth pursuing? [10 marks] The estimated value of Roxy Inc. is: The estimated gain to your friend from investing in Roxy's Inc. is: Is the investment worth pursuing (Yes/No) [SHOW YOUR WORKING] (c) Assume now that the new hotel chain is financed instead with a debt-to-value ratio of 25%, and that this leverage ratio is not expected to change over time. What is Roxy's WACC? What is its cost of equity? What is the value of Roxy? In this part, assume that the debt issued is risk-free and that there are no frictions in financial markets (no taxes, bankruptcy costs, etc). [10 marks] Roxy's WACC with leverage is: Roxy's return on equity: The value of Roxy Inc. is now: Is the investment worth pursuing (Yes/No). [SHOW YOUR WORKING] (d) After you complete your analysis in part (c), you learn that Roxy does actually pay a corporate tax of 35%. Describe the effect of corporate taxes on (i) Roxy's WACC and (ii) Roxy's expected value. [10 marks] Roxy's WACC is: [SHOW YOUR WORKING] Roxy's value is:
Expert Answer:
Related Book For
Posted Date:
Students also viewed these accounting questions
-
Is it possible to launch a new product using online communications as the primary medium for creating awareness and interest? What strategies would be necessary to make such a plan work?
-
Your company is preparing to launch a new product over the next 10 years. The equipment to make this new product will have an initial cost of $154000 to the company. At the end of the project, you...
-
New Day Bank plans to launch a new deposit campaign next week in hopes of bringing in from $100 million to $600 million in new deposit money, which it expects to invest at a 4.25 percent yield....
-
In Problems 1130, solve each equation by factoring. x 2 + 4x = 0
-
Why would it be appropriate for a company that builds aircraft carriers for the Navy to use a single overhead rate?
-
International trade has gone through many changes, especially during the last 60 years. It is really amazing how we can identify very different trends and dramatic changes in the way we interact...
-
List eight environmental quality control elements audit firms should implement to help ensure that high quality audits are performed by the firm.
-
Gap, Inc., is trying to incorporate human resource and supplier considerations into its management decision making. Here is Gaps report of findings from a recent Social Responsibility Report: Because...
-
Evolving standards of decency is used to assess the progress of a maturing society in determining what is cruel and unusual punishment in the context of the Eighth Amendment (Merlo and Benekos,...
-
Noble plc, a listed company, has for a number of years paid an annual dividend of 90p per share on its 200,000 ordinary shares, which have a total market value of 930,000 cum div. The next annual...
-
You are looking to purchase a commercial building. The challenge is it is on leased land, and the current land lease expires in 5 years. The property currently has tenants, and you have certain cash...
-
A vehicle is stationary next to a railroad track. A train passes by with a speed of v. = 225 km/h and blows its whistle with a source frequency of fs = 450 Hz. Assuming that the speed of sound v =...
-
Simplify. 3 X 205x X 2 16-x
-
Solve the proportion and check. -8 3 = p 24 The solution set is (_).
-
The term "Resilience" is often viewed in terms of the operating capacity of an organization to react to and recover from a disaster.Discuss the concept of Disaster Resilience in terms of capabilities...
-
Add and simplify. (-2+8i)+(9+9i) (-2+8i)+(9+9i) = (Simplify your answer. Type your answer in the form a + bi.)
-
The manager of K&K Ltd is considering a new investment opportunity at the end of December 2020. The company has two independent divisions: Division A and Division B. Any of these divisions can take...
-
State whether each of the following will increase or decrease the power of a one-way between-subjects ANOVA. (a) The effect size increases. (b) Mean square error decreases. (c) Mean square between...
-
Discuss the extent to which the incidence of budgetary slack is likely to be affected by the use of each of the techniques listed: (i) Rolling budgets; (ii) Flexible budgets; (iii) Planning and...
-
Explain the 'learning curve' and discuss its relevance to setting standards.
-
The accountant of Laburnum Ltd is preparing documents for a forthcoming meeting of the budget committee. Currently, variable cost is 40 per cent of selling price and total fixed costs are 40 000 per...
-
Show the details leading to the equation (1.52) in the text, \[D_{\mathrm{AA}}=\frac{1}{3} \bar{c} \lambda\] where \(D_{\mathrm{AA}}\) is the self-diffusion coefficient.
-
Estimate the thermal conductivity of water if the speed of sound in water is \(1498 \mathrm{~m} / \mathrm{s}\). Compare your answer with the experimental values.
-
For most liquids other than water and substances with polyhydroxy groups, the thermal conductivity decreases with an increase in temperature. Water shows an anomalous effect. The conductivity, \(k\),...
Study smarter with the SolutionInn App