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please help me answer this problem: Evaluate this investment project for CompanyXYZ. The risk-free rate is 6% the market risk premium is 4% and the
please help me answer this problem:
Evaluate this investment project for CompanyXYZ. The risk-free rate is 6% the market risk premium is 4% and the beta of the equity of Company XYZ is 1.5. The debt/equity ratio is 0.5. Finally, it is assumed that CAPM holds, and so do the Modigliani and Miller assumptions.
1. required rate of return demanded by CompanyXYZ equity- holders? Appropriate discount rate for the firm's current projects? Assume that the debt is risk-free.
2. Assume that the new project has the same risk as the assets of CompanyXYZ itself. The investment cost is 2 000 000 dollars and the project generates an income of 500,000 dollar per year (at the end of the year) during the next three years. Do you recommend CompanyXYZ to go ahead with the project? Explain why and show your calculAtions.
3. Now assume that the debt/equity ratio is 1.0
instead. Without further calculations and given the new capital structure, would you recommend that CompanyXYZ go ahead with the project? Explain
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