The pure-play approach, Corporate Finance

Assignment Help:

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?

 


Related Discussions:- The pure-play approach

Expert triangulation - forecasting methods, Method is the ?rst of two metho...

Method is the ?rst of two methods proposed by Mantrala and Rao (2001) and has been reviewed in Section 2.We use a simpli?ed version, with ?xed prices and for a single period. Furth

State the equation for net premium, Question: (a) (i) De ne net premium...

Question: (a) (i) De ne net premium and state the equation for net premium. (ii) Arshad, aged exactly 50, buys a 15-year endowment assurance policy with a sum assured of $ 5

Annuities, You are considering the purchase of a deferred annuity that will...

You are considering the purchase of a deferred annuity that will pay $10,000 a year at the end of each year for 20 years, to you or a desgnated survivor. (sure thing) Payments wil

Do managers really look after the interest of shareholders, Question: "...

Question: "The separation of ownership and control of a corporate firm has given rise to what is called ‘a positive and normative divide' in explaining managerial behaviour. F

Find net payment of the company, a)    Black Corp. currently has $65 millio...

a)    Black Corp. currently has $65 million worth of floating rate debts carried at an average rate of LIBOR + 2.6% that it would like to hedge against rising interest rates withou

Risk-return relationship, Problem 1 What is a bill of exchange? Explain...

Problem 1 What is a bill of exchange? Explain carefully the requisites for a bill of exchange to be valid.  Problem 2 You have a close friend, Peter, who is a renowned

How could phoenix activity be addressed, Q. How could phoenix activity be a...

Q. How could phoenix activity be addressed? A range of actions have been suggested to mitigate phoenix activity. These suggested actions were selected on the basis of: - pr

Estimate the dollar-equivalent or adjusted rate of return, In January 2009 ...

In January 2009 you bought a German stock portfolio for 6,000,000 Euros and sold it in December 2009 for 7,000,000 Euros.  Assume that over the same period the dollar's exchange ra

Mncs do increase their risk by borrowing foreign currencies, According to t...

According to those who are in favor of borrowing, the MNCs can achieve lower financing costs and hence their competing ability is improved. But according to the international fishe

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd