Texas chemicals is a major producer of oil-based fertilisers

Assignment Help Financial Management

Reference no: EM13730743

Texas Chemicals is a major producer of oil-based fertilisers in the US. The company’s stock is currently selling for $80 per share and there are 10 million shares outstanding. The company also has debt outstanding with a market value of $400 million. The company’s current capital structure approximates well its target position. The company’s equity beta is equal to 2.0.

The company is considering an expansion project which is expected to generate a rate of return of 20% annually. Assuming a corporate tax rate of 50%, risk free rates of 8%, and the expected rate of return on the market portfolio of 17%, determine whether the company should go ahead with the project under the following scenario:

The project’s risk is different (larger) from that of the company. The project’s unlevered beta is 2.5. Also, consistent with its higher risk level, the project is expected to generate a rate of return of 25%. Further, as a result of the project’s higher risk level, the company has decided to use a more conservative capital structure represented by a debt-to-asset ratio of 15%.

Reference no: EM13730743

Questions Cloud

Depreciation deduction by the straight-line method : Assume you buy a new machine for $100,000 in January of a tax year that corresponds to a calendar year. Assume the machine is placed into service in August of the same tax year. The estimated life of the machine is eight years when salvage value is e..

Describe the history of the project : Large plans were underway between China and Mexico for a 200 acre mega-mall, Dragon Mart, to be built by China near Cancun, Mexico. Describe the history of the project

Long-term-large-scale change : After one year, you will be expected to begin opening additional stores in Brazil, Russia, India, and China (also known as the B.R.I.C. countries). This will be a long-term, large-scale change.

Engage the many components of planning the implementation : An individual project where you will engage the many components of planning the implementation of Windows Server 2008 Active Directory. With increased use of computer technology, many medical practices, clinics and doctor's offices are moving away fr..

Texas chemicals is a major producer of oil-based fertilisers : Texas Chemicals is a major producer of oil-based fertilisers in the US. The company’s stock is currently selling for $80 per share and there are 10 million shares outstanding. The company also has debt outstanding with a market value of $400 million...

What is the organizational innovation of the pin factory : What is the organizational innovation of the pin factory and what, according to Smith, is its significance for society?

Explain the models organizations use to manage forecasting : Explain, and provide examples of, the models organizations use to manage forecasting, planning, and inventory. Examine, and provide examples of, the costs absorbed by organizations with respect to inventory and logistics.

Write an essay on reagan and the evil empire : America would be different if these events or people had not occurred or existed, or had events happened differently. Reagan and the "Evil Empire", Operation Cyclone.

What is not a pitfall of the irr rule : What is not a pitfall of the IRR rule? It can be biased against large scaled projects, compared to the NPV rule. Sometime multiple solutions or no solution

User Account

All Pages