Doubleday Brewery is considering a new project. The company currently has a target debt–equity ratio of...

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Doubleday Brewery is considering a new project. The companycurrently has a target debt–equity ratio of .45, but the industrytarget debt–equity ratio is .65. The industry average beta is 1.46.The market risk premium is 9.5 percent, and the (systematic)risk-free rate is 3.1 percent. Assume all companies in thisindustry can issue debt at the risk-free rate. The corporate taxrate is 27 percent. The project will be financed at Doubleday’starget debt–equity ratio. The project requires an initial outlay of$4,200,000 and is expected to result in a $405,000 cash inflow atthe end of the first year. Annual cash flows from the project willgrow at a constant rate of 3.5 percent until the end of the eighthyear before leveling off at that same annual level (no longergrowing) forever thereafter. Using the WACC methodology, value thisproject and tell whether it should be pursued.

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3.8 Ratings (359 Votes)

We need to calculate the Net Present Value for this project which will tell us if this project should be pursued or not The formula for the same is Cash outlay CF1 1 WACC CF2 1WACC2 CF3 1WACC3 CF8 1WACC8 PV of cash flows after the 8th year 1 WACC9 Now lets break down each of these terms Cash outlay 4200000 well take the negative of this See Answer

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Doubleday Brewery is considering a new project. The companycurrently has a target debt–equity ratio of .45, but the industrytarget debt–equity ratio is .65. The industry average beta is 1.46.The market risk premium is 9.5 percent, and the (systematic)risk-free rate is 3.1 percent. Assume all companies in thisindustry can issue debt at the risk-free rate. The corporate taxrate is 27 percent. The project will be financed at Doubleday’starget debt–equity ratio. The project requires an initial outlay of$4,200,000 and is expected to result in a $405,000 cash inflow atthe end of the first year. Annual cash flows from the project willgrow at a constant rate of 3.5 percent until the end of the eighthyear before leveling off at that same annual level (no longergrowing) forever thereafter. Using the WACC methodology, value thisproject and tell whether it should be pursued.