You are choosing between two companies to become an 8% equity owner in. NI Capital structure of 63% equity and 37% debt
Posted: Wed Mar 30, 2022 3:47 pm
You are choosing between two companies to become an 8% equity
owner in.
NI
Capital structure of 63% equity and 37% debt
Current market value of equity is $3,428,000
Beta = 1.80
You are choosing to flow one of these companies through your
respected investment company: JITV. You invest money into JITV,
which will then be used to purchase 8% of one of the companies. So
far, only $250,000 has been put into JITV. If JITV needs extra
funding for the investment, the Bank of Bakersville is available
for borrowing money at a rate of 4.5%. JITV is currently in the 17%
marginal tax bracket. The beta for JITV is 1.45.
As of right now, the 90-day Treasury Bill rate is 0.25%, the
5-Year Treasury rate is 1.75%, and the 10-Year Treasury rate is
2.95%. The expectations is to return 9.25% for the upcoming
year.
1. Which company should JITV invest in and why?
2. If both VHI and NI has the same cash flows until the end of
time, then what will the value of each investment be to JITV.
(Please show calculations)
(Please use Capital Asset Pricing Model and Weighted Average
cost of Capital equations)
owner in.
NI
Capital structure of 63% equity and 37% debt
Current market value of equity is $3,428,000
Beta = 1.80
You are choosing to flow one of these companies through your
respected investment company: JITV. You invest money into JITV,
which will then be used to purchase 8% of one of the companies. So
far, only $250,000 has been put into JITV. If JITV needs extra
funding for the investment, the Bank of Bakersville is available
for borrowing money at a rate of 4.5%. JITV is currently in the 17%
marginal tax bracket. The beta for JITV is 1.45.
As of right now, the 90-day Treasury Bill rate is 0.25%, the
5-Year Treasury rate is 1.75%, and the 10-Year Treasury rate is
2.95%. The expectations is to return 9.25% for the upcoming
year.
1. Which company should JITV invest in and why?
2. If both VHI and NI has the same cash flows until the end of
time, then what will the value of each investment be to JITV.
(Please show calculations)
(Please use Capital Asset Pricing Model and Weighted Average
cost of Capital equations)