Q3: Capital budgeting and cost of capital Reno Co is considering a project that will cost...

Q3: Capital budgeting and cost of capital

Reno Co is considering a project that will cost $ 26,000 and result in the following cash flows:

Years	1	2	3	4
Project Cash flow	10,000	11,500	12,600	14,800

The views of the directors of Reno Co are that all investment projects must be evaluated over four years of operations using net present value. You have given the information below to assist you to calculate the appropriate discount rate:

Reno Co has 1.3 million shares of stock outstanding and the stock currently sell for $20 per share. The market value of the debt is $4.56 million and cost of debt is 6.061%
The risk free rate is 3.5588% and the market risk premium is 10%
You have estimated that Reno Co has a beta of 0.75
Corporate tax rate is 34%

Required:

Estimate cost of equity using CAPM and define the security market line.
Estimate the cost of capital.
Evaluate the investment project using the NPV criteria and cost of capital estimated above.
State clearly any limitations and assumptions that you made in your calculations.

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Q3: Capital budgeting and cost of capital Reno Co is considering a project that will cost...

Q3: Capital budgeting and cost of capital Reno Co is considering a project that will cost $ 26,000 and result in the following cash flows: Years 1 2 3 4 Project Cash flow 10,000 11,500 12,600 14,800 The views of the directors of Reno Co are that all investment projects must be evaluated over four years of operations using net present value. You have given the information below to assist you to calculate the appropriate discount rate: Reno Co has...

Ella, Inc. is considering a new capital budgeting project (the “Investment”). The Investment will cost $102,030...

Ella, Inc. is considering a new capital budgeting project (the “Investment”). The Investment will cost $102,030 that must be invested today, and $105,000 that must be invested at the end of year one. The Investment will have the following net cash inflows at the end of each of the next three years. Year 1: $50,000; Year 2: $75,000; and Year 3: $100,000. The financial accounting net operating income for each of the next three years is as follows: Year 1:...

shannon co. is considering a project that has the following cash flow and cost of capital...

shannon co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project discount paycheck? R+ 12.00% Year 0 1 2 3 CF -$1000 $450 $425 $400 $410 $400

A firm is considering investing in a 25 year capital budgeting project with a net investment...

A firm is considering investing in a 25 year capital budgeting project with a net investment of 14 Million. The project is expected to generate annual net cash flows each year of 2 million and a terminal value at the end of the project of 1 million. The firms costs of capital is 14 percent and marginal tax rate is 40%. What is the internal rate of return of this investment?

A firm is considering investing in a 15-year capital budgeting project with a net investment of...

A firm is considering investing in a 15-year capital budgeting project with a net investment of $14 million. The project is expected to generate annual net cash flows each year of $2 million and a terminal value at the end of the project of $10 million. The firm’s cost of capital is 9 percent and marginal tax rate is 40%. What is the profitability index of this investment?

How would a very risky investment/project be handled in the capital budgeting/cost of capital context?

CAPITAL BUDGETING DECISION MAKING DATA Cost of Project = $180.00 m Life of Project = 7...

CAPITAL BUDGETING DECISION MAKING DATA Cost of Project = $180.00 m Life of Project = 7 yrs Use Stratight Line Depreciation to Book Value of ZERO. This Project requires building a Mfg Plant in Ghana. Plant will produce Bi-Cyle Parts. In addition to Cost of Project, it is estimated that ST Investment of $ 35m will be required, 90% of this investment would be recoverable at the termination of the Project. Salvage Value of Plant at end of 7th yr...

6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting...

6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting Narrative: (Use the following information for questions referring to the narrative): Aferine Electric is considering a new project. The initial investment required is $106,639.60 and the cost of capital is 8%. Expected cash flows over the next four years are given below: Years Cash Flow ($) 1 7,000 2 37,000 3 41,000 4 90,000 A) 17.1% B) 13.8% C) 14.1% D) 15.0% E) 8%

Reno, Inc., is considering a project to establish a plant for producing and selling consumer goods...

Reno, Inc., is considering a project to establish a plant for producing and selling consumer goods in an under developed country. Assume that the host country’s economy is very dependent on oil prices, the local currency of the country is very volatile, governance standards are quite Page | 4 compromised with a high pedigree of unfair practices and the sovereign or country risk is considered to be high. It is known that the host country’s economic conditions are un-related to...

Capital Budgeting Methods Roosevelt Corporation is considering the acquisition of machinery and equipment at a cost...

Capital Budgeting Methods Roosevelt Corporation is considering the acquisition of machinery and equipment at a cost of $500,000. No new working capital is required to support the new equipment. The equipment has an estimated useful life of five years and a salvage value of $0. Roosevelt Corporation uses the straight-line method of depreciation. The new equipment is expected to provide an annual net cash flow benefit of $170,000 per year during the five-year period of its useful life. Required: Evaluate...

Subjects