The pure-play approach, Corporate Finance

Hydra Multinational is a vast conglomerate firm involved in a wide array of business ventures ranging from satellite radio to cat food.  One of its many divisions, a restaurant chain, is considering the value in trying to push its brand into a new geographical market and thus needs to estimate the appropriate cost of capital for this highly complex project.  To help in your analysis, your junior analysts gathered some relevant data for you:

Hydra has $11.3 billion in debt outstanding, a market capitalization of $26 billion, and its average tax rate is 34%.  New bonds would have to be issued with a 6.74% coupon rate while there is sufficient retained earnings to pay for the expansion (internal equity will be allocated such that the capital structure will not change).

The closest market competitor for the restaurant chain, Extra Chicken, has a beta of 1.8 with the broad market.  Its most recent bond sale (still trading very close to par) offered a 7.8% coupon rate and it also faces a 34% tax rate.  Their D/E ratio is 0.63.  The risk-free rate is estimated to be an average of 3.2% for the appropriate time horizon and the market risk premium is estimated to be 6.7% over the coming years.   

a)  What cost of capital should be applied to Hydra's restaurant chain expansion plan?

b)  Why would the discounted payback approach not be an appropriate way to evaluate such a project?  What important information is missing from that kind of analysis?

c)   What does it mean when we assume that two firm's have the same business risk?


Posted Date: 2/23/2013 3:15:01 AM | Location : United States

Related Discussions:- The pure-play approach, Assignment Help, Ask Question on The pure-play approach, Get Answer, Expert's Help, The pure-play approach Discussions

Write discussion on The pure-play approach
Your posts are moderated
Related Questions
In this section, we will compare the ?ve forecasting methods using the case study data described in Section 4. Methods 1-3 will ?rst be compared for the full data set (assortment g

The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated

Many ERP vendors have developed strategies to make their software available to small to medium enterprises (SME's). These strategies have focused around pre-configured solutions, i

Source of short term finance

what is the agency relationship between shareholders and auditore

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique. Your company is considering the constructio

You are a ceo of a sotware firm that has limited access to debt equity markets. The average return on last year projects is 28 % . and cost of capital is 12%. would npv pr Irr be

Continue with the Strategy of choice - Calculate the Net Present Value (NPV) - Determine the Internal Rate of Return (IRR) - Set Electrolux’s Required Rate of Return (RRR) E

Analyse the budget shown below, and discuss any issues raised regarding cash flow and legal requirements. Suggest at least three alternative courses of action the organisation cou