Determining the discount rate, Accounting Basics

Determining the Discount Rate

XYZ (APP) Ltd is a biotechnology company that recently listed on the Australian Securities Exchange (ASX). As such, XYZ Ltd has very limited stock price history and no security analysts following it. XYZ Ltd is company that researches, develops and commercialises new therapies for MacDonald's Disease. XYZ Ltd is entirely equity financed; it has no debt in its capital structure. XYZ has currently has a market capitalisation of around $A200 million and the stock price of around $A2 per share. Prior to listing the company was operating at a loss each financial year. Your group is part of an investment bank that has been hired by XYZ Ltd to advise the board on several issues. Specifically, you have been asked to prepare a report addressing the following criteria:

1. XYZ's limited stock data means the company has no equity beta. Thus, you are required to identify a suitable proxy (or proxies) with which to determine APP's equity beta. You do not need to calculate this beta yourselves. Instead, you may make use of a commercial beta (or betas). You must, however, justify your choice of proxy (proxies).

2. Using relevant market data, you must determine an appropriate required rate of return on equity, using the CAPM model, for the company to use in each of the following situations:

a. In evaluating a one-year time horizon investment project. This nature of this project is consistent with the company's core line of business.

b. In evaluating a ten-year time horizon investment project. This nature of this project is consistent with the company's core line of business.

 c. As the discount rate in pricing an issue of $A40 million in new equity

3. With reference to appropriate peered-reviewed academic literature, you have been asked to justify the choices you have made in determining the discount rate (rates) used for section 2 above.

Posted Date: 2/15/2013 6:35:34 AM | Location : United States

Related Discussions:- Determining the discount rate, Assignment Help, Ask Question on Determining the discount rate, Get Answer, Expert's Help, Determining the discount rate Discussions

Write discussion on Determining the discount rate
Your posts are moderated
Related Questions
Dividing Partnership Income Desmond Drury and Ty Wilkins have decided to form a partnership. They have agreed that Drury is to invest $44,700 and that Wilkins is to invest $1

Weekly tasks or assignments (Individual or Group Projects) will be due by Monday and late submissions will be assigned a late penalty in accordance with the late penalty policy fou

Determining needed adjustments Adjustments are required since certain changes take place during the accounting period. As time passes, although, the value of the asset is consu

Q. Explain accrual basis of accounting? In certain circumstances companies may perhaps use the cash basis for income tax purposes. All through the text we use the accrual basis

I submitted an assignment this morning and have heard nothing back

Closing entries perhaps prepared directly from the work sheet. The first journal entry debits all items appearing in the Income Statement credit column as well as credits Income Su

Q. Explain about Percentage of completion method? The percentage-of-completion method makes out revenue based on the estimated stage of completion of a long-term project. To ca

Money payable by customers (individuals or corporations) to the other entity in exchange for goods or services that have been given or used, but not yet paid for. Receivables typic

Mr. Horace, aged 25, has $25,000 cash to invest for his retirement. In addition, he plans to save and invest $8,000 per year (at the end of every year) for the next 40 years, at wh

Desrocher Ltd. issued an instalment note on January 1, 2014 (with a required yield of 9%), in exchange for land that it purchased from Safayeni Ltd. Safayeni's real estate agent