Question
You are considering starting a company that manufactures racing bicycles. You are planning on financing your firm 40% equity and 60% debt. You estimate that
You are considering starting a company that manufactures racing bicycles. You are planning on financing your firm 40% equity and 60% debt. You estimate that your upfront costs will be $5M, and that you will earn an EBIT of $1M per year for the next 12 years. Lightning Bolt Bikes makes racing bicycles similar to the ones that you wish to manufacture. They have a CAPM equity beta of 1.9 and a debt to equity ratio of 0.7. The tax rate for both firms is 35%, the riskless rate is 3%, and the expected return on the S&P500 is 15%
Part A (5 points). What is the asset beta of Lightning Bolt Bikes?
Part B (5 points). What is your unlevered cost of equity?
Part C (5 points). What is your firm's equity beta?
Part D (10 points). What is your firm's weighted average cost of capital?
Part E (5 points). What is the NPV of your proposed bicycle company using the WACC method?
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