Ch 8 C1_Correct 1

Ch 8 C1_Correct 1 - Chapter 8 Problem C1 (Finding the WACC...

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Chapter 8 Problem C1 (Finding the WACC using surrogate firms) Easter Chemical has an oil and gas subsidiary that is considering the purchase of $100 million worth of proven oil and gas properties. Eastern’s financial staff has compiles the following list of firms in the same business as the project under consideration. All eight firms as well as Eastern pay income tax at a 34% marginal rate. Eastern’s target debt ratio is 0.40 and its oil and gas subsidiary’s target debt ratio is 0.50. a. Calculate an estimate of the unleveraged beta, β A for the proven oil and gas project. Eastern’s subsidiary has bonds outstanding with a yield to maturity of 15.15%. b. Assuming a 10% riskless return and a 6% expected excess return on the market portfolio, calculate the required return on unleveraged equity, r e , for the project. c. Calculate the WACC. FIRM EQUITY BETA DEBT RATIO, L N.J. Chemical 1.35 0.35 Great Lakes Chemical 1.25 0.25 Johnson Chemical 1.50 0.45 Clark Chemical 1.40 0.40 Franklin Oil
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This note was uploaded on 09/18/2011 for the course FIN 303 taught by Professor Bernile during the Spring '11 term at University of Miami.

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Ch 8 C1_Correct 1 - Chapter 8 Problem C1 (Finding the WACC...

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