Question
You are working for the Volkswagen Group that is considering establishing a two-year project in New Zealand with a 30 million initial investment. The project
You are working for the Volkswagen Group that is considering establishing a two-year project in New Zealand with a 30 million initial investment. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. All cash flows are remitted to the parent. Assume no taxes.
Your supervisor, Walter White, has a given you a task to figure out the break-even salvage value for this project. Your team has forecasted a stable exchange rate of 0.60 per NZ$ over the next two years.
To help you figure out the required rate of return, you colleague, Jesse Pinkman, has handed you an Excel file with information on 5 different car manufacturers.
You need to make a quick presentation for Walter White. You get a maximum of 10 power point slides to convince Mr. White that your estimated required rate of return for Volkswagen Group and the break- even salvage value for this project is accurate. Assume that the CAPM is the true model for this exercise.
Here are some things that you should convey in your presentation.
- What is the average asset beta for the comparable firms?
- Do you think it is reasonable to assume that the CAPM is a good model when estimating the required rate of return? Why?
Total Revenue | Capital Expend | EBITDA | Projected Growth Rate | Market Value of Equity | Historical Debt to Value | Total Debt | Cash | Equity Beta | Debt Beta | |
Auto Manufacturers | ||||||||||
Nissan Motor | 82,101 | 11,432 | 10,879 | 6.2% | 40,013 | 0.564 | 51,796 | 6,698 | 0.75 | 0.15 |
Peugeot | 53,607 | 2,428 | 3,318 | 7.0% | 12,230 | 0.642 | 21,914 | 10,521 | 1.25 | 0.06 |
Renault | 41,055 | 2,703 | 3,967 | 8.9% | 23,096 | 0.611 | 36,299 | 14,049 | 0.91 | 0.00 |
Tata Motors | 33,811 | 4,100 | 5,647 | 5.5% | 16,701 | 0.396 | 10,952 | 7,125 | 0.88 | 0.15 |
Volkswagen | 202,458 | 16,613 | 23,048 | 3.5% | 52,916 | 0.724 | 139,021 | 34,143 | 0.75 | 0.08 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started