Question

TRAV is a firm in the travel/leisure industry and TRAV uses a discount rate of 15%...

TRAV is a firm in the travel/leisure industry and TRAV uses a discount rate of 15% when valuing projects that are simply an expansion of its current business.

Assume that this is the appropriate discount rate for TRAV to use. What is the expected return on equity for TRAV?

Homework Answers

Answer #1

When it is being given that the rate of of discounting is 15% related to valuation of projects by the company and it is also used as expansion of the current businesses so this can be treated as the hurdle rate which the company will be using in the overall valuation process.

The company will need more than the hurdle rate in order to accept a project because the hurdle rate will be the cost it will be incurring on different projects.it will need to recover at least more than 15% on its projects in order to accept them so it can be said that the return on equity for the company should be more than 15% in order to have acceptance.

It is a General assumption that the company will be only accepting those products which will be having a return on equity higher than that of the cost of capital so it will be always trying to generate rate of return more than 15% as return on equity.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
In financial analysis, it is important to select an appropriate discount rate. A project’s discount rate...
In financial analysis, it is important to select an appropriate discount rate. A project’s discount rate must be high to compensate investors for the project’s risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity. Consider this case: The Mitata Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. The Mitata Co.’s retained earnings will...
The weighted average cost of capital for a firm with debt is the: Multiple Choice discount...
The weighted average cost of capital for a firm with debt is the: Multiple Choice discount rate that the firm should apply to all of the projects it undertakes. rate of return a company must earn on its existing assets to maintain the current value of its stock. coupon rate the firm should expect to pay on its next bond issue. minimum discount rate the firm should require on any new project. rate of return debtholders should expect to earn...
You want to estimate the appropriate discount rate for a new project. For this, you find...
You want to estimate the appropriate discount rate for a new project. For this, you find that there is a comparable firm ABC being traded on financial markets with the following data: debt-equity ratio 1.00, and equity beta 1.5. The current T.Bill rate is 4percent and the market risk premium is 8 percent. Assume that the debt of firm ABC is risk-free. What is the appropriate discount rate for the project?
An all-equity firm is considering the projects shown below. The T-bill rate is 6 percent and...
An all-equity firm is considering the projects shown below. The T-bill rate is 6 percent and the market risk premium is 6 percent. Project Expected Return Beta A 11 % 0.8    B 21 % 1.5    C 15 % 1.7    D 19 % 1.9    Calculate the project-specific benchmarks for each project. (Round your answers to 2 decimal places.) Project A %   Project B %   Project C %   Project D % If the firm uses its current WACC of...
The most appropriate discount rate to use when applying a FCFE valuation model is the: Select...
The most appropriate discount rate to use when applying a FCFE valuation model is the: Select one: a. WACC b. Risk-free rate c. Required rate of return on equity or risk-free rate depending on the debt level of the firm d. Cost of Debt e. Cost of Equity
Which of the following is true regarding a reasonable choice for a discount rate to apply...
Which of the following is true regarding a reasonable choice for a discount rate to apply to interest tax savings? Choices ==v a) If the firm is expected to decrease its debt ratio, you should use the expected return on the firmʹs equity, E(requity) b) If the firm is expected to maintain a constant debt ratio, you should use the firmʹs weighted average cost of capital, WACC                                                                                              c) If the firm is expected to increase its debt ratio, you...
​(​Risk-adjusted discount rates and risk classes​) The G. Wolfe Corporation is examining two​ capital-budgeting projects with​...
​(​Risk-adjusted discount rates and risk classes​) The G. Wolfe Corporation is examining two​ capital-budgeting projects with​ 5-year lives. The​ first, project​ A, is a replacement​ project; the​ second, project​ B, is a project unrelated to current operations. The G. Wolfe Corporation uses the​ risk-adjusted discount rate method and groups projects according to​ purpose, and then it uses a required rate of return or discount rate that has been preassigned to that purpose or risk class. The expected cash flows for...
Air Travel Industry You are a researcher for a professional research firm. Your firm has won...
Air Travel Industry You are a researcher for a professional research firm. Your firm has won a contract to do a study for an air travel industry publication. The editors of the publication would like to know their readers’ thoughts on air travel factors such as ticket purchase, services, safety, comfort, economic growth, and security. They would also like to know the thoughts of adults who use air travel for business as well as for recreation. The editors have given...
You are computing the discount rate for a project in the furniture business. Your firm is...
You are computing the discount rate for a project in the furniture business. Your firm is 100% equity financed and will remain that way. There are three publicly traded firms that are in the furniture business and are not involved in any other lines of business. However, only one of these three firms is 100% equity financed. You should only use the 100% equity-financed “pure play” for your calculations because the equity betas of the other two pure plays are...
The current risk-free rate is 4% and the expected rate of return on the market portfolio...
The current risk-free rate is 4% and the expected rate of return on the market portfolio is 10%. The Brandywine Corporation has two divisions of equal market value, i.e. the market value of their assets is the same. The debt to equity ratio (D=E) is 3/7. The companyís debt can be assumed to present no risk of default. For the last few years, the Brandy division has been using a discount rate of 12% in capital budgeting decisions and 1...