Question

Sunset Sarsaparilla is building a new bottling plant. This plant will cost $140M to construct, and will produce EBIT of $19M per year for the next 12 years. Sunset has a tax rate of 40%. Another firm in the same industry, Vim Pop, has an equity beta of 1.2 and a debt to equity ratio of 0.9. Sunset’s debt to equity ratio is 1.5, the risk free rate is 4%, and the excess return on the market is 8%. Assume both firms can borrow at 5.5%.

1A. Find Sunset’s equity beta using Vim as a comparable firm.

1B. Estimate Sunset Sarsaparilla’s cost of levered equity

1C. Using this estimated cost of equity, find the NPV of opening this bottling plant using the WACC method.

Answer 1