Question #3Texas Chemical

Question #3Texas Chemical

Question #3Texas Chemicals is a major producer of oil-based fertilisers in the US. The company?s stock is currently selling for $80 per share and there are 10 million shares outstanding. The company also has debt outstanding with a market value of $400 million. The company?s current capital structure approximates well its target position. The company?s equity beta is equal to 2.0.The company is considering an expansion project which is expected to generate a rate of return of 20% annually. Assuming a corporate tax rate of 50%, a risk free rate of 8%, and the expected rate of return on the market portfolio of 17%, determine whether the company should go ahead with the project under the following scenarios:a) The project has the same risk level as the company.b) The projects risk is different from that of the company. The unlevered beta is 2.5. Also, consistent with higher risk, the project is expected to generate a return of 25%. As a result of higher risk, the compane has decided to use a more conservative capital structure represented by a debt to asset ratio of 15%Assume the rate of interest on bonds is risk free.

%d bloggers like this: