Company devoted primarily to paper products

Assignment Help Financial Management

Reference no: EM131905496

JKL Corporation is a company devoted primarily to paper products. JKL Corp. has an equity beta of 1.0 and a debt ratio, i.e. a debt-to-asset ratio (D/(D+E)), in market value terms, of 0.3. The company is planning to build a vegetable processing plant. Management plans to maintain this debt ratio in the future. A comparable (vegetable processing) firm, Agro-Corp, has an equity beta of 0.8 and a debt ratio, i.e. a debt-to-asset ratio (D/(D+E)), in market value terms, of 0.2. The risk-free rate is 5% and the estimated market risk premium is 8%. The applicable marginal tax rate is 40%. (A reminder: If a dollar of assets is financed with, say, 60 cents of debt, then 40 cents is financed with equity).

a) What is JKL’s estimated cost of equity for projects that it undertakes in the paper products industry (its current business focus)?

b) Estimate JKL’s asset beta.

c) Estimate the asset beta for the comparable vegetable processing company, Agro-Corp.

d) As stated before, JKL plans to build a vegetable processing plant. It wishes to estimate the cost of equity appropriate for such a plant. What cost of equity should JKL use in this situation?

Reference no: EM131905496

Questions Cloud

Sales method and aging of accounts receivable method : Estimating bad debts can be done by the percentage of sales method and the aging of accounts receivable method.

Rate of return-dividend growth and value of common stock : Discuss the relationship between the rate of return, dividend growth, and value of common stock.

What is the net present worth of project : The firm's tax rate is 41%, and its market interest rate is 15%. What is the net present worth of this project?"

Calculate wacc for both capital structures : What is the WACC of Potenza, if the company considers a capital structure of 50 percent common stock, Calculate WACC for both capital structures.

Company devoted primarily to paper products : JKL Corporation is a company devoted primarily to paper products. JKL Corp. has an equity beta of 1.0 and a debt ratio, i.e. a debt-to-asset ratio (D/(D+E)),

What earnings before interest and tax : What earnings before interest and tax (EBIT) must the firm have if it were to provide $1 per share to the shareholders? Assume perfect markets.

Asset valuation and risk personal finance problem : what is the most Laura should pay for the asset if it is classified as? low-risk,? average-risk, and? high-risk.

Make any other deposits after the initial deposit : how much to the nearest dollar do you need to deposit now to meet your wishes? You will not make any other deposits after the initial deposit.

Make earnings per share the same for ski and board : Calculate the level of EBIT that would make earnings per share the same for Ski and Board.

User Account

All Pages