Unformatted text preview: ACTSC 372 – Assignment 2 – due on February 16, 2007 1. [3 points] Pizza Planet Inc. is an all-equity firm with a beta of 0.85. The market risk premium is 8% and the risk-free rate is 3%. The company is considering a project that will generate annual after-tax cash flows of $210,000 at the end of each year for 4 years. The project requires an immediate investment of $800,000. (a) If the project has the same risk as the firm as a whole, should Pizza Planet undertake the project? (b) What is the smallest value for the annual after-tax cash-flow that would justify the project being undertaken? 2. [3 points] An all-equity firm is considering undertaking a project that requires an initial outlay of $500,000, and that generates after-tax cash-flows of $75,000 at the end of each year for 10 years. (a) What is the internal rate of return for this project? (b) If the risk-free rate is 5% and the market risk premium is 4%, then what is the largest value of beta that will make the firm accept the project?premium is 4%, then what is the largest value of beta that will make the firm accept the project?...
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This note was uploaded on 09/18/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.
- Winter '09