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1) LongLegs, Inc. is the all-equity firm whose present business involves manufacturing and selling designer jeans. Company is blessed in that it operates in capital markets which are perfect, i.e., there are no taxes or bankruptcy costs. Present weighted average cost of capital (WACC) of LongLegs, Inc. is 11.50%, and its equity beta is= 2.00. LongLegs, Inc. is allowing for penetrating wind energy business. Wind project needs a= $10,000,000 investment at t = 0 and will yield $500,000 a year for predictable future, starting year from today (at t = 1). Manager of new wind project realizes that he is only responsible for production of electricity and that virtually all risk is idiosyncratic; after all, wind just blows whenever it wishes to. Risk free rate is 2.50%, market risk premium (average difference between return on market and risk-free rate) is 4.50%, and wind project will be financed with equity. Determine the NPV of this project?

Basic Finance, Finance

  • Category:- Basic Finance
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