AsiaChem is a pharmaceutical company in Asia. The company’s research department has identified a compound that can cure a common cold without any side effects. Unfortunately, the manufacture of this compound requires the company to invest heavily in a high technology factory which will use a number of new techniques, some of which are unproven. The company will also need to recruit and retain the services of a number of eminent scientists, each of whom is both vital to the project and would be irreplaceable. Financing this project will require the company to borrow heavily. The company is unlikely to survive as an independent entity if it invests in this project and it fails. The directors have been advised that there is at least a 50% chance of a catastrophic failure. The project has a beta of 0.5. The risk free rate is 3% and the equity risk premium is 8%. The project offers an estimated return of 24%. Required: I. Calculate the required rate of return for the project. II. Explain how investing in this project would affect the wealth of AsiaChem plc.’s shareholders.
AsiaChem is a pharmaceutical company in Asia. The company’s research department has identified a compound that can cure a common cold without any side effects. Unfortunately, the manufacture of this compound requires the company to invest heavily in a high technology factory which will use a number of new techniques, some of which are unproven. The company will also need to recruit and retain the services of a number of eminent scientists, each of whom is both vital to the project and would be irreplaceable. Financing this project will require the company to borrow heavily. The company is unlikely to survive as an independent entity if it invests in this project and it fails. The directors have been advised that there is at least a 50% chance of a catastrophic failure. The project has a beta of 0.5. The risk free rate is 3% and the equity risk premium is 8%. The project offers an estimated return of 24%. Required: I. Calculate the required rate of return for the project. II. Explain how investing in this project would affect the wealth of AsiaChem plc.’s shareholders.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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AsiaChem is a pharmaceutical company in Asia. The company’s research department has identified a compound that can cure a common cold without any side effects. Unfortunately, the manufacture of this compound requires the company to invest heavily in a high technology factory which will use a number of new techniques, some of which are unproven. The company will also need to recruit and retain the services of a number of eminent scientists, each of whom is both vital to the project and would be irreplaceable. Financing this project will require the company to borrow heavily. The company is unlikely to survive as an independent entity if it invests in this project and it fails. The directors have been advised that there is at least a 50% chance of a catastrophic failure. The project has a beta of 0.5. The risk free rate is 3% and the equity risk premium is 8%. The
project offers an estimated return of 24%.
Required:
I. Calculate the required rate of return for the project.
II. Explain how investing in this project would affect the wealth of AsiaChem
plc.’s shareholders.
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