Question
Engineering = 2.2 Sportswear = 1.1 Water utility = 0.6 The companys financial structure is presently 70% equity and 30% debt. The cost of debt
Engineering = 2.2
Sportswear = 1.1
Water utility = 0.6
The companys financial structure is presently 70% equity and 30% debt. The cost of debt is 8% and the cost of equity is calculated using the Capital Asset Pricing Model (CAPM) where the industry average asset beta is 1.2; the risk free rate is 6% and the market risk premium is 8%. The corporate tax rate is 30%.
The financial manager has provided the following estimates of after-tax cash flow for the three projects which are assumed to have equal lives of 5 years.
Year | Engineering (in GHm) | Sportswear (in GHm) | Water Utility (in GHm) |
0 | (5) | (3) | (15.0) |
1 | 2.00 | 1.80 | 5.60 |
2 | 2.50 | 1.25 | 4.85 |
3 | 2.70 | 0.85 | 4.50 |
4 | 1.50 | 0.50 | 3.70 |
5 | 0.90 | 0.30 | 2.80 |
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