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 47 times
and Intercontinental Hotels Group is risk free. None of these firms
hold excess cash assets.
Assume now that Roxy is financed instead with a debt to
value ratio of 25%, and this leverage ratio is not expected to
change. Assume that the debt issued is risk free and there are
no frictions in financial markets.
Answer the following questions:
a) Calculate Roxys WACC with leverage?
b) Calculate Roxys ROE with leverage?
c) Calculate the value of Roxy with leverage?
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%