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The stock of Green-Earth Corp., a renewable energy and tax exempt firm, has an expected...

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Finance

The stock of Green-Earth Corp., a renewable energy and tax exempt firm, has an expected return on equity of 12% according to the CAPM. Green-Earth assets are financed with debt and equity in the same proportion each. The debt of Green-Earth is risk free. If the market risk premium is 5% and the T-bill rate is 2%, calculate:

a) The equity beta (E). [2 points]

b) The beta of Green-Earth assets unlevered. [2 points]

c) The cost of capital of the unlevered firm. [2 points]

d) The levered cost of equity. [2 points]

e) The weighted average cost of capital. [2 points]

f) Green-Earth is considering investing in a one-year project with an initial investment of $150 million and an expected cash flow of $173 million only. If the financing structure of the project is the same as the firm as whole (i.e., financing with the same debt to equity ratio), determine:

f1) The Net present value of the project. [2 points]

f2) The internal rate of return of the project. [2 points]

f3) Should the project be accepted? Justify your answer. [2 points]

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