Question
The Rice Solar Corp. has a new investment opportunity that generates expected cash flows of $80 million per year (end of year) forever. The managers
The Rice Solar Corp. has a new investment opportunity that generates expected cash flows of $80 million per year (end of year) forever. The managers of Rice Solar are not sure what the required rate of return for the project should be, so they examine A&M Solar Inc. whose main business is very similar to the new project Rice Solar is evaluating. The expected return of the market portfolio is 8%, and the annual risk-free rate is 2%. The volatility of the market portfolio is 20%, and the covariance between the market portfolio and A&M Solar Inc. is 0.3. Assume that tax rates are equal to zero; A&M Solar and Rice Solar have no debt. a. What is the of the assets of A&M Solar Inc.? b. What is the expected return of A&M Solar Inc.? c. What is the present value of the cash flows of the new investment opportunity of Rice Solar Corp? d. If the project requires an investment of $500 million, should Rice Solar go ahead with it? Why?
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