Question:
You and your friends have decided to examine the potential of starting a series of restaurants in and around college campuses in Boston that cater exclusively to students. Assume that (together) you have $120,000 (equity) for this project which requires an initial investment of $200,000. The remaining amount of $ 80,000 can be raised through issuing bonds. You are given the following additional information about the project.
Year Free Cash Flow
1 $ 20,000
2 $ 40,000
3 $ 60,000
4 $ 80,000
5 $ 100,000
Other Information:
Beta based on similar businesses 2.00
Risk Free Rate 4.50% / year
Market Risk Premium 8.00% / year
Price per Bond $ 1,050
Face Value of Bonds $ 1,000
Coupon Rate on Bonds 8.50 %
Coupons Paid Monthly
Maturity of Bonds 5 years
Tax rate for firm 30%
Will you accept or reject this project? Why?
Please show your work to help me going forward.