_468 x 60_20091205090514.jpg)
Which project should X invest in? And what will its new cost of equity be?
X is an all equity financed firm with a market value of £21m and a beta of 1.1. X is presently considering opportunities. Project A and project B, both which require investment of £5m. With respect to both of these projects the returns will be received in perpetuity.
A
beta = 0.7
expected return net of corporation tax = 16%.
B
beta = 0.4
expected return net of corporation tax = 11%.
Financing of the project will be obtained by raising new risk free debt.
Return on the market portfolio is given as 18% and return on the risk free security = 8%. Assume that the capital market is in equilibrium. Corporation tax = 35%.
