Question

哪位好心人能帮忙解一下这道金融题呀!

The financial manager of BBT plc is examining a £16 million real asset investment project, which is a diversification away from the firm’s existing mainstream activities into a new industry sector. £4 million of the project is financed by internally generated funds, £6.5 million by long-term loans of which £1.5 million is a subsidised loan, and £5.5 million by rights issue. The new project is expected to generate pre-tax net cash flows of £8.5 million per annum, for a period of five years. The residual value at the end of the project is forecast to be £2 million after tax. As the project is in an area that the government wishes to develop, the subsidised loan will cost BBT plc 4% below the firm’s normal cost of long-term debt finance, which is 10%. The issue costs are estimated to be 1% for debt, and 3% for equity. These costs are not tax allowable.
BBT’s equity beta is 0.8, and its capital gearing is 50% debt, and 50% equity by market value. The average geared equity beta in the new industry sector is 1.12 and is based on an average capital gearing of 60% equity and 40% debt by market value.
The annual risk-free rate is 10%, and the expected market return is 25% per annum. Corporate tax is 40%.

Required:
(a) Calculate the unlevered cost of capital for the new project, using the Capital Asset Pricing Model (CAPM).
[10 marks]
(b) Calculate the Adjusted Present Value (APV) of the proposed investment project, and recommend whether BBT should take up the new project.
[50 marks]
(c) Discuss the circumstances under which the APV method might be a better method of evaluating real asset investment decisions when compared to the Net Present Value (NPV) method.
[40 marks]
[Total 100 marks]

Answer 1

diversification away from the firm’s existing mainstream activities into a new industry sector 这句话要圈出来。。

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