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Part III. Long Questions 1. Neon Corporation's stock returns have a covariance with the market portfolio of 0.031. The standard deviation of the returns on
Part III. Long Questions 1. Neon Corporation's stock returns have a covariance with the market portfolio of 0.031. The standard deviation of the returns on the market portfolio is 0.16, and the expected market risk premium is 8.5%. Neon's bond yield 11% p.a. The market value of the bonds is $24 million. Neon has 4 million shares of common stock outstanding, cach worth $15. Neon's CEO considers the firm's current debt-equity ratio optimal. The corporate tax rate is 34%, and Treasury bills currently yield 7% p.m. (a) What is Neon's equity beta? (b) What is Neon's current debt-equity ratio? (c) Neon is considering the purchase of additional equipment that would cost $27.5 million. The expected unlevered cash flows defined as the after-tax cash flows the equipment would generate under all-equity financing) from the equipment are $9 million per year for five years. Purchasing the equipment will not change the risk level of the firm. Calculate the NPV of the project using the WACC approach to determine whether or not Neon should purchase the equipment
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