Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your company operates a steel plant. Onaverage, revenues from the plant are $33 million per year. All of theplant's costs are variablecosts, and are consistently

Your company operates a steel plant. Onaverage, revenues from the plant are $33 million per year. All of theplant's costs are variablecosts, and are consistently 90% of revenues.(This includes the energy costs associated with powering the plant which represent one quarter of theplant's costs, or an average of $7.43 million peryear.) Suppose the plant has an asset beta of 1.19, therisk-free rate is 3%, and the market risk premium is 6%. The tax rate is 34%, and there are no other costs.

a. Estimate the value of the plant today assuming no growth.

b. Suppose you enter along-term contract which will supply all of theplant's energy needs for a fixed cost of $3 million per year(before tax). What is the value of the plant if you take thiscontract?

c. How would taking the contract in (b) change theplant's cost ofcapital? Explain.

a. Estimate the value of the plant today assuming no growth.

The value of the plant today assuming no growth is $

nothing

million. (Round to two decimalplaces.)

b. Suppose you enter along-term contract which will supply all of theplant's energy needs for a fixed cost of 3 million per year(before tax). What is the value of the plant if you take thiscontract?

The value of the plant if you take this contract $

nothing

million. (Round to two decimalplaces.)

c. What is theplant's overall cost of capital if you chose to enter the contract in part (b)?

Theplant's overall cost ofcapital, if you choose to enter the contract in part (b) is

nothing

%. (Round to one decimalplace.)

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

Financial Management Theory And Practice

Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason

3rd Canadian Edition

017658305X, 978-0176583057

More Books

Students also viewed these Finance questions