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
what is assets and its type ?

The comparative statements of Lucille Company are presented here. LUCILLE COMPANY Income Statements For the Years Ended December 31 First number are 2012 2012 then 2011

#What kinds of risks does a firm like Amazon.com face with respect to safeguarding its assets? What types of controls do you think it already has in place to minimize these risks?

Dogwood florist opened a business January 1st 2010. During 2010, they had the following transactions and economic events. For each of the transactions and economic events prepare

Q. Describe Exceptions to the realization principle? Exceptions to the realization principle: The following illustrations are instances when practical considerations may cause

define accounting. Briefly explain its concepts

When common stock has a par value of $2 and a market value of $15: 1.) the liability of the stockholders is $13 per share 2.) there will be additional paid-in capital of $1

Q. Advantage of a pre-inventory sale? Have you still taken advantage of a pre-inventory sale at your favourite retail store Many stores offer bargain prices to decrease the mer

The use of ledger accounts A journal entry is similar to a set of instructions. The execution of these instructions is known as posting. Since stated earlier posting is recordi

How do your calculated stock prices compare to the company's present stock prices?   What do you think is causing them to deviate? This will need you to investigate a lit