UltraMX Corp., an all equity exchange traded company, is planning to invest in a project as...

70.2K

Verified Solution

Question

Finance

UltraMX Corp., an all equity exchange traded company,is planning to invest in a project as follows:
Initial investment = $100 million.
The project is financed with debt and equity in same proportion(i.e., one part of debt to one part of equity).
Expected cash flows after tax = $10 million in perpetuity.
Tax rate = 25%
Cost of debt after tax of project (4%)
Equity beta of project = 1.5
UltraMX beta = 0.8
Market risk premium (MRP) =6%.
Risk-free rate = 3%.
Based on above information, answer the following questions:
Calculate the appropriate discount rate (cost of capital) forUltraMX project.
Determine whether UltraMX should accept or reject theproject using NPV and IRR, respectively.
Assume the current market value of the firm is $500 million andmarkets are efficient in the semi-strong form:
1) what would happen to the value ofthe firm after announcing the project?
2) what would be the percent change inthe share price of UltraMX after announcing theproject?
3) what would be the fair value ofUltraMX after announcing the project?

Answer & Explanation Solved by verified expert

4.5 Ratings (800 Votes)

a PostTax Cost of Debt 4 Equity Beta 15 MRP 6 and RiskFree Rate 3 Therefore Cost of Equity 315 x 6 12 Capital Structure one part debt and one part equity Debt Proportion Equity Proportion 05 Discount Rate of Project 4 x See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

UltraMX Corp., an all equity exchange traded company,is planning to invest in a project as follows:Initial investment = $100 million.The project is financed with debt and equity in same proportion(i.e., one part of debt to one part of equity).Expected cash flows after tax = $10 million in perpetuity.Tax rate = 25%Cost of debt after tax of project (4%)Equity beta of project = 1.5UltraMX beta = 0.8Market risk premium (MRP) =6%.Risk-free rate = 3%.Based on above information, answer the following questions:Calculate the appropriate discount rate (cost of capital) forUltraMX project.Determine whether UltraMX should accept or reject theproject using NPV and IRR, respectively.Assume the current market value of the firm is $500 million andmarkets are efficient in the semi-strong form:1) what would happen to the value ofthe firm after announcing the project?2) what would be the percent change inthe share price of UltraMX after announcing theproject?3) what would be the fair value ofUltraMX after announcing the project?