You have the following initial information on CMR Co. on which to base your calculations and discussion for questions 1) and 2): • Current long-term and target debt-equity ratio (D:E) = 1:4 • Corporate tax rate (TC) = 30% • Expected Inflation = 1.75% • Equity beta (E) = 1.6385 • Debt beta (D) = 0.2055 • Expected market premium (rM – rF) = 6.00% • Risk-free rate (rF) = 2.15% 1) The CEO of CMR Co., for which you are CFO, has requested that you evaluate a potential investment in a new project. The proposed project requires an initial outlay of $7.15 billion. Once completed (1 year from initial outlay) it will provide a real net cash flow of $575 million in perpetuity following its completion. It has the same business risk as CMR Co.’s existing activities and will be funded using the firm’s current target D:E ratio. a) What is the nominal weighted-average cost of capital (WACC) for this project?
You have the following initial information on CMR Co. on which to base your calculations
and discussion for questions 1) and 2):
• Current long-term and target debt-equity ratio (D:E) = 1:4
• Corporate tax rate (TC) = 30%
• Expected Inflation = 1.75%
• Equity beta (E) = 1.6385
• Debt beta (D) = 0.2055
• Expected market premium (rM – rF) = 6.00%
• Risk-free rate (rF) = 2.15%
1) The CEO of CMR Co., for which you are CFO, has requested that you evaluate a
potential investment in a new project. The proposed project requires an initial outlay of
$7.15 billion. Once completed (1 year from initial outlay) it will provide a real net cash
flow of $575 million in perpetuity following its completion. It has the same business risk
as CMR Co.’s existing activities and will be funded using the firm’s current target D:E
ratio.
a) What is the nominal weighted-average cost of capital (WACC) for this project?
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