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Both Dow Chemical Company, a large natural gas user, and Superior Oil, a major natural gas producer, are thinking of investing in natural gas wells
Both Dow Chemical Company, a large natural gas user, and Superior Oil, a major natural gas producer, are thinking of investing in natural gas wells near Houston. Both companies are all equity financed. Dow and Superior are looking at identical projects. They've analyzed their respective investments, which would involve a negative cash flow now and positive expected cash flows in the future. These cash flows would be the same for both firms. No debt would be used to finance the projects.Both companies estimate that their projects would have a net present value of $ million at an percent discount rate and a $ million NPV at a percent discount rate. Dow has a beta of whereas Superior has a beta of The expected risk premium on the market is percent, and riskfree bonds are yielding percent. Should either company proceed?Should both? Explain.
Both Dow Chemical Company, a large natural gas user, and Superior Oil, a major natural gas producer, are thinking of investing in natural gas wells near Houston. Both companies are all equity financed. Dow and Superior are looking at identical projects. They've analyzed their respective investments, which would involve a negative cash flow now and positive expected cash flows in the future. These cash flows would be the same for both firms. No debt would be used to finance the projects.Both companies estimate that their projects would have a net present value of $ million at an percent discount rate and a $ million NPV at a percent discount rate. Dow has a beta of whereas Superior has a beta of The expected risk premium on the market is percent, and riskfree bonds are yielding percent. Should either company proceed?Should both? Explain.
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