Scenario of what would happen to the market value of a firm if it uses the

hurdle rate $($overall firm$$s cost of capital$)$ for a project with different risk

as the firm.

MegaMart Corp., an all equity public company, is planning to invest in a new

line of business.

$$ Initial investment $=$ $$100$ million.

$$ Expected cash flows $=$ $$10$ million in perpetuity.

$$ The Industry beta in which the new line of business belongs $=2\mathrm{.}0.$

$$ MegaMart beta $=0\mathrm{.}8$

$$ MRP $=6\%.$

$$ Risk free rate $=4\%.$

Based on above information, answer the following questions:

a$)$ Calculate the hurdle rate.

b$)$ Calculate the discount rate for the new line of business.

c$)$ Determine whether MegaMart would accept or reject the project under

the following rates:

c$1)$ hurdle rate.

c$2)$ project$$s discount rate.

a$)$ Assume the current market value of the firm is $$1,000$ million.

d$1)$ What would happen to the value of the firm after announcing the

project? Why?

d$2)$ What would be the fair value of MegaMart $($after announcing the

project$)?$

e$)$ What is the IRR of the project?