Question

Hero Manufacturing is considering to make an investment to develop a new plane that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The company has a target debt-equity ratio of .75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects

what is maximum initial cost company is willing to pay for project?

Hero Manufacturing is trading at a price of $71. In the last 10K, the company has book value per share of $6 and 5 million shares of common stock outstanding. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $65 million and a coupon of 6 percent and sells for 96 percent of par. The second issue has a face value of $45 million and a coupon of 7 percent and sells for 105 percent of par. The first issue matures in 21 years, the second in 5 years. Assume a systematic risk of 1.2%.

What is the overall unlevered beta of Hero Manufacturing?

Answer 1