Problems-Hurdle Rates and Cash flows

Problems-Hurdle Rates and Cash flows - Problems Estimating...

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Problems: Estimating Hurdle Rates for Projects 1) You are advising a phone company that is planning to invest in projects in multimedia. The beta for the telephone company is 0.75 and has a debt/equity ratio of 1.00; the after tax cost of borrowing is 4.25%.The multimedia business is considered to be much riskier than the phone business; the average beta for comparable firms is 1.30 and the average debt/equity ratio is 50%. Assuming that the tax rate is 40%: (The riskless rate is 7%) a) Estimate the unlevered beta of being in the multimedia business. b) Estimate the beta and cost of equity if the phone company finances its multimedia projects with the same debt/equity ratio as the rest of its business c) Assume that a multimedia division is created to develop these projects , with a debt equity ratio of 40%. Estimate the beta and cost of equity for the projects with this arrangement. 2) Philip Morris is reexamining the costs of equity and capital it uses to decide on investments in its two primary businesses-food and tobacco. It has collected the
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This note was uploaded on 10/26/2011 for the course MBA 0001 taught by Professor Akshat during the Spring '09 term at Institute of Management Technology.

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Problems-Hurdle Rates and Cash flows - Problems Estimating...

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