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Please answer 12.7 and 12.9, thank you !! The following two stocks are available for purchase. Utilize this information to answer questions 1-10. 7 Cost
Please answer 12.7 and 12.9, thank you !!
The following two stocks are available for purchase. Utilize this information to answer questions 1-10. 7 Cost of Debt Estimation How do you determine the appropriate cost of debt for a company? Does it make a difference if the company's debt is privately placed as opposed to being publicly traded? How would you estimate the cost of debt for a firm whose only debt issues are privately held by institutional investors? 2.9 Company Risk versus Project Risk 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 are all-equityfinanced companies. 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. Each company estimates that its project would have a net present value of $1 million at an 18 percent discount rate and a $1.1 million NPV at a 22 percent discount rate. Dow has a beta of 1.25, whereas Superior has a beta of .75. The expected risk premium on the market is 8 percent, and risk-free bonds are yielding 12 percent. Should either company proceed? Should both? ExplainStep by Step Solution
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