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Unformatted text preview: Problem 1: Bruin Basketball Inc. is in charge of operating the concessions stands at all of the UCLA basketball games. This operation is currently funded with a mix of 20% debt and 80% equity. The debt is structured as $20 million in AAA bonds with a 5% yield to maturity. The equity is privately held. However, we observe publicly traded stock prices for ACC Basketball Enterprises, which operates concessions for all of the ACC schools. This company has shown an equity beta of 1.4 against the S&P 500 and has a 50% AAA debt and 50% equity structure. Its bonds also show a 5% yield to maturity. Bruin Basketball is considering expanding its operations to also cover concessions at the UCLA Soccer games. This will require an upfront investment of $30 million, and will then provide $6 million in annual cash flow for the indefinite future. For the questions below, use a risk free rate of 3%, a market risk premium of 7%, and a corporate tax rate of 35%. Furthermore, assume that AAA debt has a 0.2 beta with market movements. a. Estimate the asset beta for Bruin Basketball Inc b. What is the expected return on equity for Bruin Basketball Inc? c. What is the WACC for Bruin Basketball Inc? d. Assume that Bruin Basketball funds the project with both debt and equity such that their capital structure remains unchanged. What is the NPV of the project? 2. PharmaTech Solutions, Inc is a biotechnology company with a potential blockbuster drug 2....
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- Winter '10