27 Projects that Are Not Scale Enhancing Blue Angel Ltd, a private firm in the holiday gift...
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27 Projects that Are Not Scale Enhancing Blue Angel Ltd, a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of 0.40, but the industry target debt–equity ratio is 0.35. The industry average beta is 1.2. The market risk premium is 8 per cent, and the risk-free rate is 7 per cent. Assume all companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 28 per cent. The project requires an initial outlay of £450,000 and is expected to result in a £75,000 cash inflow at the end of the first year. The project will be financed at Blue Angel’s target debt–equity ratio. Annual cash flows from the project will grow at a constant rate of 5 per cent until the end of the fifth year and remain constant for ever thereafter. Should Blue Angel invest in the project?
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