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
Question: In view of its international operations management, Remo Ltd which is based in USA expects to make a payment of £ 50,000 to a UK supplier for raw materials in six mon

determine the pay \back period for the project.

is cash considered to be additive to this method of valuation?

I have been given 3 different types of projects. They state the IRR and how much the project will add. The question goes on to give a WACC with break points. The question wants

You have just graduated from Stanford''s MBA program and have secured a position as a fund manager for a well known investment banking house. You have been given $300 million to m

Nipissing, Inc,, is considering a new three year expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset falls in CCA Class 8 with a a 20

Explain what caused "the long boom" in the U.S. and world economy from the early 1980s to its peak in 2006.  Make sure to mention, with a few key facts in each case, the role playe

DIFFERENTIATE BETWEEN ALLOCATIVE EFFICIENCY AND PRICING EFFICIENCY

Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest)

corporate finance, Financial Accounting Calculate the market value of Renowned Cola''''s debt at year-end 2005. What is the book value of debt? Why do usually use market or book va