Your company operates a steel plant. On? average, revenues from the plant are ?$30 million per year. All of the? plant's costs are variable? costs, and are consistently 80% of revenues.? (This includes the energy costs associated with powering the plant which represent one quarter of the? plant's costs, or an average of $6.00 million per?year.) Suppose the plant has an asset beta of 1.25?, the? risk-free rate is 4%?, and the market risk premium is 5%. The tax rate is 40%?, and there are no other costs.
a. Estimate the value of the plant today assuming no growth.
b. Suppose you enter a? long-term contract which will supply all of the? plant's energy needs for a fixed cost of $33 million per year? (before tax). What is the value of the plant if you take this? contract?
c. How would taking the contract in (b?) change the? plant's cost of? capital? Explain