Difference between market return and the risk free rate

Assignment Help Financial Management

Reference no: EM131940405

You have been asked to value one of the biggest global companies, Malicaca, Inc., but using only the information provided to you (modified to camouflage the real identity of the company). Malicaca, Inc. is expected to have revenues of $500 million next year (t = 1) that are expected to grow at 8% per year thereafter for the foreseeable future. The data presented to you shows that COGS and SGA are expected to remain at 50% and 10% of revenues for the foreseeable future. For simplicity, you are also asked to make the following assumptions: (a) depreciation is 15% of revenues; (b) it is safe to assume that capital expenditures will be approximately equal to depreciation; and, (c) Malicaca, Inc. will be able to manage with no changes in working capital.

You are also provided some detailed information about the Malicaca, Inc.’s main competitors and some market data. The business competitors have an average beta of equity of 2.50, and an average debt/equity ratio of 35% with an average beta of debt of 0.25. The risk free rate is 2.50% and the expected market risk premium (the difference between the market return and the risk free rate) is 4.00% for the foreseeable future. The tax rate is 34%. Suppose the equity beta of Malicaca, Inc. is equal to the beta assets in this business, its current debt/equity ratio is (No more than two decimals in the percentage number but do not enter the % sign.):

Reference no: EM131940405

Questions Cloud

Describe how each of these elements could be used to benefit : MGT104 Introduction to Applied Marketing - Explain each of these strategy elements and describe how each of these elements could be used to benefit

What do you think is going to happen : What do you think is going to happen when the economy is growing, businesses are trying to expand, and unemployment is approaching zero?

What do we mean by Optimal Capital Structure : What do we mean by "Optimal Capital Structure" and what's the relationship between Optimal Capital Structure and Cost of Capital

Is there a situation where gdp might be declining : Is there a situation where GDP might be declining but not all of its components are? Which one or ones might still be growing if GDP is shrinking?

Difference between market return and the risk free rate : The risk free rate is 2.50% and the expected market risk premium (the difference between market return and the risk free rate) is 4.00% for foreseeable future

What did the great depression mean to typical floridians : What did the Great Depression mean to typical Floridians? What happened to their living standard and lifestyle? Who suffered the most? Who suffered the least?

Sometimes fail to allocate resources efficiently : Why do markets sometimes fail to allocate resources efficiently? How can government policies potentially improve the market's allocation

List five specific groups that were affected by given event : List five specific groups that were affected by this event. Provide two examples for each cohort describing how they were affected.

What are the pros and cons of globalization : What are the pros and cons of globalization? How can a country prepare for it? What needs Canada to do to benefit from the globalization?

User Account

All Pages