Question
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.)
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