Question
SuperSun Inc.'s (SSI's) asset beta is 1.40. The risk-free rate (i.e., the return on a US Treasury security) is 1.0% and the expected return on
SuperSun Inc.'s (SSI's) asset beta is 1.40. The risk-free rate (i.e., the return on a US Treasury security) is 1.0% and the expected return on the market (i.e., on the S&P 500 Index) is 6.0%. Based on the Capital Asset Pricing Model, the appropriate required return on SSI's assets (i.e., the enteprise) is enter your response here%. [Round your answer to one decimal (e.g., 21.0%). ] [ Review / side learning: Recall the balance-sheet view of the enterprise ... it is shaped like an inverted L. The enterprise consists of a firm's current assets (the top-left part of the balance sheet), the firm's current liabilities (the top-right part of the balance sheet), and the firm's long-term assets (the bottom-left part of the balance sheet). It does not include the middle-right piece of the balance sheet (i.e., the long-term liabilities), nor does it include the bottom-right piece (i.e., owners' equity). ] SSI is evaluating a new project, to make solar-powered airplanes. The project requires an initial outlay of $350,000 and offers anticipated future cash flows of $80,000 at the ends of years 1-6. I. Using the firm-level required return as the required return in calculating the airplanes project's NPV, what will be the project's NPV? Answer: $enter your response here. [Round your answer to the nearest dollar. For a negative number, just put a minus in front of your entry.] Using the NPV decision rule, should SSI accept or reject the project? Answer: enter your response here. [Enter just one word: accept or reject.] II. Further analysis indicates that the airplanes project has a beta of 2.60. In other words, this new potential project is riskier/safer [pick one] than the overall SSI enterprise that currently exists. Answer: enter your response here. Use this project-specific beta and the CAPM to determine the project-specific required return. Answer: enter your response here%. [Round your answer to one decimal (e.g., 3.0%). ] In turn, use this required return to calculating the airplanes project's NPV. Answer: $enter your response here. [Round your answer to the nearest dollar. For a negative number, just put a minus in front of your entry.] Using this NPV answer, does the NPV rule indicate that you should accept or reject the airplanes project? enter your response here. III. In term's of the firm's objective of maximizing shareholder wealth, what should SSI do with this solar-powered-airplanes project (accept or reject)? Answer: enter your response here.
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