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Question-3 You are planning to make an investment in a car manufacturing factory. The factory can be constructed and operationalized immediately at a cost of
Question-3 You are planning to make an investment in a car manufacturing factory. The factory can be constructed and operationalized immediately at a cost of $10 million. The cost of capital is 6% per year. Should you invest in the factory? Assume that all revenue and maintenance costs occur at the end of the year. You intend to run the factory as long as the revenues generated by the factory exceeds the costs. The factory will generate revenues of $1 million per year forever. You expect that the total costs of operating the factory will start at $50,000 per year and will increase at a rate of 5% per year thereafter.
Question-4 Assume that you have been requested by the management of OF Corporation to estimate the weighted average cost of capital (WACC). The company (OF Corporation) has 1000 shares outstanding and each share is selling for $40 per share. The market value of debt is 45% of the market value of equity. The beta of the stock is 2.2, and the firm currently has a AAA rating, with a corresponding Yield to Maturity of 11%. The current risk-free rate is 10% and the market risk premium is 7.6%. What is market value of debt? What is WACC?
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