Question
(a) What is the appropriate discount rate for a corporate projects CAPITAL CASH 7 FLOWS where you have the following info for the business: Stock
(a) What is the appropriate discount rate for a corporate projects CAPITAL CASH 7 FLOWS where you have the following info for the business:
Stock Price $ 20
Market-Book Multiple (Equity) 2 X
Total Capitalization (Book) $100 Million
Book Debt/Total Capital 40%
Required Return on Equity 10%
Required Return on Debt 6%
(b) The firm from part (a) is considering a project where they invest $15 million today in cash and get a 20 year annuity that has its first cash flow beginning in three years from now. The annuity will be a success generating $2.5 million/yr with probability 40% but a failure that only generated $1 million/yr with 20% probability; otherwise it earns $1.5 million/yr. 8
Should they invest in it?
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