Question
Am Trans Corp. is considering a new casino project which generates $20 million free cash flow per year indefinitely. The risk-free rate of return is
Am Trans Corp. is considering a new casino project which generates $20 million free cash flow per year indefinitely.
The risk-free rate of return is 3% and the market risk premium, over and above the risk-free rate, is 9%.
Berkshire estimates that the beta of the new casino project is 1.3 and plans to maintain the debt-equity ratio of the casino to be one. Berkshire has recently issued bonds which pay an annual coupon of 4% and have a yield to maturity of 6%. Berkshire faces a 30% tax rate.
What is the maximum price Am Trans Corp. would pay for the casino project in order for the investment to be acceptable.
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