Q7:

Your company operates a steel plant. On average, revenues from the plant are $44 million per year. All of the plant's costs are variable costs, and are consistently

78% of revenues. (This includes the energy costs associated with powering the plant which represent one quarter of the plant's costs, or an average of $8.58 million per year.) Suppose the plant has an asset beta of 1.29, the risk-free rate is 3%, and the market risk premium is 6%. The tax rate is 30%, and there are no other costs.

a. Estimate the value of the plant today assuming no growth.

b. Suppose you enter a long-term contract which will supply all of the plant's energy needs for a fixed cost of $

3 million per year (before tax). What is the value of the plant if you take this contract?

c. How would taking the contract in (b) change the plant's cost of capital? Explain.

a. Estimate the value of the plant today assuming no growth.

The value of the plant today assuming no growth is $

enter your response here

million. (Round to two decimal places.)

b. Suppose you enter a long-term contract which will supply all of the plant's energy needs for a fixed cost of

3 million per year (before tax). What is the value of the plant if you take this contract?

The value of the plant if you take this contract $

enter your response here

million. (Round to two decimal places.)

c. What is the plant's overall cost of capital if you chose to enter the contract in part (b)?

The plant's overall cost of capital, if you choose to enter the contract in part (b) is

enter your response here

%. (Round to one decimal place.)