Business, 18.03.2021 01:20 HOPING4632

You are an entrepreneur who wants to start a new firm that specializes in electric cars. Your plan is to fund this new business by offering a sizable portion of the equity ownership in this new firm. In order to correctly price this equity, you will need to calculate the value of your business. This will involve determining the proper discount rate for your expected electric car cash flows. Fortunately, there is one publicly traded electric car company (symbol: BOLT) you can use for comparison. You run a regression of BOLT excess stock returns on excess market returns and obtain an equity beta of 2.4 for BOLT. Additional research informs you that the market capitalization (i. e. market value of equity) of BOLT is $300M, the debt value of BOLT is $200M (which was issued at par and will remain a $200M in perpetuity), and the debt beta for BOLT is zero. a) What is the beta of assets for BOLT, according to the weighted beta equation? Your business partner informs you that the beta of assets you calculated in (a) is not quite the beta we should be using to calculate the expected return (discount rate) for our electric car cash flows. The reason is that BOLT is a levered firm, implying that the beta of assets for BOLT incorporates both its electric car cash flows and tax shield cash flows. Our firm does not have tax shield cash flows because it has no debt.
(b) Assume that the operating assets (OA) of BOLT equals the total assets (A) of BOLT minus the value of their tax shield (TS). Also assume a tax rate of 40 percent, and that the beta of the BOLT tax shield equals zero. What is the beta of operating assets for BOLT? You will first need to calculate the value of the BOLT tax shield, and then use the following equation to find the beta of operating assets
(OA): VOA VTS BA -Boat -BTS VoA + VTS VoA + VTS
(c) Because your firm is all-equity, the proper discount rate to apply to your electric car cash flows is the expected return on operating assets for BOLT. Assume a risk-free rate of 3 percent and a market risk premium of 5 percent. Starting next year, your firm will produce an annual perpetual free cash flow of $20M with 25% probability, $40M with 50% probability, or $60M with 25% probability. What is the value of your firm?

Answers: 3

Show answers

Another question on Business

Business, 22.06.2019 05:40

Grant, inc., acquired 30% of south co.’s voting stock for $200,000 on january 2, year 1, and did not elect the fair value option. the price equaled the carrying amount and the fair value of the interest purchased in south’s net assets. grant’s 30% interest in south gave grant the ability to exercise significant influence over south’s operating and financial policies. during year 1, south earned $80,000 and paid dividends of $50,000. south reported earnings of $100,000 for the 6 months ended june 30, year 2, and $200,000 for the year ended december 31, year 2. on july 1, year 2, grant sold half of its stock in south for $150,000 cash. south paid dividends of $60,000 on october 1, year 2. before income taxes, what amount should grant include in its year 1 income statement as a result of the investment?

Answers: 1

Answer

Business, 22.06.2019 10:00

Which term best fits the sentence? is the process of reasoning, analyzing, and making important decisions. it’s an important skill in making career decisions. a. critical thinking b. weighing pros and cons c. goal setting

Answers: 1

Answer

Business, 22.06.2019 16:30

Suppose that electricity producers create a negative externality equal to $5 per unit. further suppose that the government imposes a $5 per-unit tax on the producers. what is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

Answers: 2

Answer

Business, 22.06.2019 19:20

Royal motor corp. generates a major portion of its revenues by manufacturing luxury sports cars. however, the company also derives an insignificant percent of its annual revenues by selling its sports merchandise that includes apparel, shoes, and other accessories under the same brand name. which of the following terms best describes royal motor corp.? a. aconglomerate b. a subsidiary c. adominant-businessfirm d. a single-business firm

Answers: 1

Answer

You know the right answer?

You are an entrepreneur who wants to start a new firm that specializes in electric cars. Your plan i...

Questions