You have the following initial information on Financeur Co. on which to base your calculations and discussion for questions 1) and 2): • Current long-term and target debt-equity ratio (D:E) = 1:3 • Corporate tax rate (TC) = 30% • Expected Inflation = 1.55% • Equity beta (E) = 1.6325 • Debt beta (D) = 0.203 • Expected market premium (rM – rF) = 6.00% • Risk-free rate (rF) =2.05% 1) The CEO of Financeur 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 $7.25 billion. Once completed (1 year from initial outlay) it will provide a real net cash flow of $556 million in perpetuity following its completion. It has the same business risk as Financeur 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? b) As CFO, do you recommend investment in this project? Justify your answer (numerically).
You have the following initial information on Financeur Co. on which to base your calculations
and discussion for questions 1) and 2):
• Current long-term and target debt-equity ratio (D:E) = 1:3
• Corporate tax rate (TC) = 30%
• Expected Inflation = 1.55%
• Equity beta (E) = 1.6325
• Debt beta (D) = 0.203
• Expected market premium (rM – rF) = 6.00%
• Risk-free rate (rF) =2.05%
1) The CEO of Financeur 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
$7.25 billion. Once completed (1 year from initial outlay) it will provide a real net cash
flow of $556 million in perpetuity following its completion. It has the same business risk
as Financeur 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?
b) As CFO, do you recommend investment in this project? Justify your answer
(numerically).
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