To launch Roxy you are expected to invest $500nmillion this year
(year = 0). You are then expected to generate free cash flows of
$27 million a year starting in year 1. From then, these cash flows
are expected to grow 3% per year in perpetuity. Assume these cash
flows are received at the end of each year.
Here are reports of publicly traded firms, and the expected
returns on the government bond (treasury) and the risk premium on
the value-weighted market portfolio:
- You Are Looking To Launch A New Hotel Chain Roxy To Launch Roxy You Are Expected To Invest 500nmillion This Year Yea 1 (50.11 KiB) Viewed 41 times
and Intercontinental Hotels Group is risk free. None of these firms
hold excess cash assets.
Answer the following questions:
a) If Roxy was 100% equity financed, what would be a reasonable
estimate of the expected ROE?
b) What is Roxy's WACC?
c) Estimated value of Roxy?
d) Estimated gain from investing in Roxy?
Company Dropbox Ikea Intercontinental Hotels Group Market Value Equity 900 1,000 7,500 Market of Value Debt 150 100 2,500 of Equity Beta 2 2.3 1.6 10-year Treasury rate Expected Market Risk Premium 2.0% 5.0%