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Barona Corp. is considering five projects in five different industries. The firm will use industry average beta to evaluate the projects. The table below shows
Barona Corp. is considering five projects in five different industries. The firm will use industry average beta to evaluate the projects. The table below shows the initial capital Io or investment outlay of each project in $ million, the annual free cash flows to the firm, FCFF in $ million, economic life, N in years, the average industry beta Beta the average industry capital structure defined by debttoequity D: E ratios by market values and the corresponding debttoequity ratio financing of each project. Project Initial cost $ million Annual FCF $ million Economic life years Average industry beta Average industry D:E ratio Project D:E ratio A B C D E The riskinterest rate is while the average market return is Assume a corporate tax rate of Irrespective of which project is undertaken, the firm can raise new debt capital at above the riskfree rate. Required: i Assume the projects are independent and the firm does not have capital constraint it can undertake all projects rank the projects in order of their viability. Show all your computations. Hint: Compute the alpha value of each project. The expected returns is each projects internal rate of return IRR points ii Assume the projects are mutually exclusive. Rank them in order of their viability. Which project would you undertake? points
Barona Corp. is considering five projects in five different industries. The firm will use industry average beta to evaluate the projects. The table below shows the initial capital Io or investment outlay of each project in $ million, the annual free cash flows to the firm, FCFF in $ million, economic life, N in years, the average industry beta Beta the average industry capital structure defined by debttoequity D: E ratios by market values and the corresponding debttoequity ratio financing of each project.
Project Initial cost $ million Annual FCF $ million Economic life years Average industry beta Average industry D:E ratio Project D:E ratio
A
B
C
D
E
The riskinterest rate is while the average market return is Assume a corporate tax rate of Irrespective of which project is undertaken, the firm can raise new debt capital at above the riskfree rate.
Required:
i Assume the projects are independent and the firm does not have capital constraint it can undertake all projects rank the projects in order of their viability. Show all your computations. Hint: Compute the alpha value of each project. The expected returns is each projects internal rate of return IRR points
ii Assume the projects are mutually exclusive. Rank them in order of their viability. Which project would you undertake? points
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