Question
2A. (20 points) The asset beta for food trucks is 0.7. XYZ Food Service has a debt to equity ratio of 0.6. The riskless rate
2A. (20 points) The asset beta for food trucks is 0.7. XYZ Food Service has a debt to equity ratio of 0.6. The riskless rate is 2.3%, the expected return on the S&P 500 is 15.1%, and the tax rate is 37.4%. XYZ can borrow at 6.4%. What is the NPV of XYZ purchasing a taco truck if it has an initial cost of $313,363 and produces EBIT of $11,741 per year for the next 18 years, using the WACC method? Please give your answer to the nearest dollar.
2B. (10 points) Would owning equity in the taco truck project described above be more or less risky than owning an S&P500 index fund? Why?
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