The risk free rate is 3%, measured by a long-term U.S. government bond. The total market return is expected to be 11% over the foreseeable future. The Beta coefficient is 3.0 on the CAPM when finding out its hurdle rate for the project. The company expects to pay 5% for any new debt it receives, and its corporate tax rate is 40%.
To move forward, the company will expect to need $200 million in capital now, which they plan to finance through a combination of 30% debt and 70% equity infusions. The cash flows from this investment are expected to return $0 the first year, and then $70 million per year for the next 3 years, and then the project will be sold for $150 million
What is the weighted average cost of capital (WACC) to the firm for this project? (the “hurdle rate”)
What is the NPV of this project given the hurdle rate as you calculated WACC?
If the WACC (which is the hurdle rate here) was 10%, what would the NPV be?
What is the maximum the firm should pay before they would NOT invest in this project at a 10% hurdle rate? (In other words, what is the maximum amount of initial investment to make the company meet the 10% hurdle rate, exactly).