Unsure about solving the following
Dear Monkeys,
Last night I was given the following to solve (See Below), which I did, but I am stressing out about whether i got the thing right.
I got question 1) ~2$ and 2) ~0,02$.
Could anyone show me how it is done correctly, and what answer you get?
Thanks in advance!!
Assignment:
You have been asked to value a project for ABC. The project requires an investment outlay at t = 0 of $3,000,000. The project’s real after-tax cash flow (i.e. measured in the price level of t = 0) is estimated to be $600,000 per year for 6 years. ABC has asked you to use the following assumptions:
- Risk-free interest rate per year: 3 percent.
- Expected risk premium (on the market portfolio) per year: 5 percent.
- Asset beta of the project: 0.8.
- Corporate tax rate: 35%.
- Inflation per year: 2 percent.
- Part of the project’s investment outlay may be financed by issuing risk-free debt.
- Investment outlay is financed by ABC issuing bonds worth $1,500,000 and stocks worth
- $1,500,000.
- The project’s debt will be paid off over the project’s 6 year life: ABC has decided on an annual
- repayment of the principal of $1,500,000 / 6 = $250,000.
- ABC’s current stock price (before accepting the project): $30.
- ABC’s current number of stocks outstanding (before accepting the project): 50,000*
-
What is the expected change in ABC’s current stock price if the project is accepted?
-
Assume ABC incurs issue costs of (7 percent of $1,500,000 =) $105,000 to raise the
$1,500,000 equity for the investment outlay. What is the expected change in ABC’s current
stock price if the project is accepted?
Consequatur qui perferendis sed iure culpa autem reiciendis. Quaerat quia id facilis et quia. Delectus doloribus consequatur perspiciatis qui impedit. Architecto perspiciatis dolor facilis reprehenderit aliquid reiciendis aut totam. Fugit atque culpa accusantium sint ab veniam. Explicabo cum veniam neque iusto ratione excepturi doloremque.
Culpa in odit optio aut veritatis quidem ipsa. Ut dolor nihil a eos qui. Et sequi voluptas sit odio sint reprehenderit.
Sequi quis sint commodi iure. Voluptas sapiente vel quasi ut sapiente alias repudiandae reprehenderit. Aut qui magnam dicta sint rerum ut consequatur. Aliquam facilis earum vero soluta autem. Et officiis qui aut qui magnam accusantium fuga.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...