Do you advise him to undertake the project

Reference no: EM1344021

GeKay Inc. is considering a new $30m project. Its CFO, Mr. Smith, has brought you in as a consultant to advise him as to whether the project should be undertaken. First, you note that this project would have the same risk as that of GeKay's existing businesses. Further, you estimate the project's unlevered pre-tax cash flows to be $3m per year indefinitely. Mr. Smith has already decided that if he undertakes the project, he will finance the entire $30m with a new issue of 10-year bonds, at the company's pre-tax cost of debt of 6%. He also assumes that he will keep refinancing this debt indefinitely with new debt issues. Do you advise him to undertake the project? Additional data is given below:

GeKay's common stock outstanding = 10m shares

GeKay's capitalization = $500m

GeKay s (levered) β = 0.80

GeKay's c target debt ratio =0.35

GeKay's tax rate = 35%

Risk-free rate = 4%

The market's equity risk premium = 5%

Reference no: EM1344021

Questions Cloud

Calculate annual rental payment : The Borstal firm has to choose between 2 machines that do the same job but have different lives. The 2 machines have the following costs:

Find what is the stock price : What is the market value of the debt and what is the market value of the firm also find what is the stock price?

Ould there be any distinction between the full-employment : If this were the case would there be any automatic stabilizers in the government economy. Would there be any distinction between the full-employment deficit also actual budget deficits.

Compute present value of winnings : You have won the $1.4 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday, 78 years from now.

Do you advise him to undertake the project : He also assumes that he will keep refinancing this debt indefinitely with new debt issues. Do you advise him to undertake the project?

Dialog diagram for web-based system for airline : Describe each section of the dialogue box. Imagine, you are developing a web-based system for an airline. Sketch the dialog diagram for some sample screens that users will need to navigate through.

Valuation techniques-divestiture : Describe one motive for pursuing a M&A? Illustrate and provide an example of one commonly employed term in M&A? Define three types of M&A's?

Calculate cash conversion cycle : Strickler technology is thinking changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year $3,250,000 (all on credit), & its net profit margin was 7 percent.

Compute nominal gdp in every year : Assume the subsequent data describe o/p in two different yrs. Compute nominal GDP in every yr.

User Account

All Pages