Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The financial manager of HW is considering a project. It will produce just one cash flow in year 1, but with some uncertainty. It has

The financial manager of HW is considering a project. It will produce just one cash flow in year 1, but with some uncertainty. It has 10% of chance to generate $8 million in year 1, 60% of chance to generate $3 million, and 30% to generate $0. The project requires $2.5 million investment today. The project has the average risk level of the company. You also have some information on the company. HWs cost of debt is 4.5%. Beta of debt is 0.2. The average estimate for the beta of HWs industry is 1.5 with standard error of 0.3. The ratio of debt to overall company value is 20%. Assume market return based on historical data is 9%, risk free rate is 0.5% and corporate tax rate is 21%.

(a). Whats cost of equity for company HW by using CAPM model? (keep four decimals) [12 points]

(b). Whats the after-tax WACC of HW? (keep four decimals) [18 points]

(c). Whats NPV of the project based on your answer in (a) and (b)? (keep four decimals) [24 points]

(d). Should the financial manager take the project and why? [4 points]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Real Life Money An Honest Guide To Taking Control Of Your Finances

Authors: Clare Seal

1st Edition

1472272293, 978-1472272294

More Books

Students also viewed these Finance questions

Question

5-8 What are the advantages and disadvantages of the BYOD movement?

Answered: 1 week ago