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Corporate Financial Management: 3.FBA is a food processing rm that wishes to setup a small icecream business. The new business is expected to have a
Corporate Financial Management: 3.FBA is a food processing rm that wishes to setup a small icecream business. The new business is expected to have a net cash ow it $53,030 in its rst year. The cash flows are projected to grow at a high rate of 20% until the end of year 3, and thereafter at a rate of 3% per year in perpetuity. The project will be all-equityr financed, the initial investment is SEDUQUD. {a} If the appropriate discount rate is 12%, should FBA undertake the project? [3 marks] [b] The inhouse business analyst suggests to benchmark the discount rate with Gelateria, a competing ice-cream maker. Gelateria does not have debt and has a beta of 1.5l]. If the market risk premium is 3% and riskfree rate is 3%, should PEEP. undertake the project? ['3 marks] [cj The inhouse business analyst is corrfid ent about the rst three years estimated cash ows but is skeptical on the 2% longterm growth rate. What isthe N P'u' if the long term growth rate is zero using the discount rate provided in part [a]? [3 marks]
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