(a) If Roxy Inc. were to be 100% equity financed, what would be a reasonable estimate of the expected return on Roxy's equity? What is Roxy's WACC? expected return on equity is: Roxy's WACC is: [SHOW YOUR WORKING] Your friend is looking to launch a new hotel chain, Roxy Inc., designed to serve the travelingneeds of the budget-minded millennial traveler.To launch Roxy Inc., she is expected to invest $500 million this year (year=0). The hotel chainis expected to generate free cash flows of $27 million per year, starting in year 1. Thereafter,these free cash-flows are expected to grow at 3 percent per year in perpetuity. For simplicity,assume these cash-flows are received at the end of each year.Your friend knows you've been taking this class, so she asked you to assess the potential valueof the new hotel chain. To help you, she gives you the following reports for a handful ofpublicly-traded firms, as well as the expected returns on the government bond (Treasury),and the risk premium on the value-weighted market portfolio:MarketValueEquity900CompanyDropboxIkeaIntercontinental Hotels Group10-year Treasury rateExpected Market Risk Premium1,0007,5002.0%5.0%Marketof ValueDebt1501002,500of EquityBeta22.31.6Assume throughout that the CAPM holds for all assets, and that the debt of Dropbox, Ikea,and Intercontinental Hotel Group is risk-free. None of these firms hold (excess) cash assets.

Return on Equity:The financial performance indicator known as return on equity (ROE) is obtained by…

Answered: WORKING]

Business

Finance

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Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1iM

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Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
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A small start-up biotech firm anticipates that it will have cash outflows of $200,000 per year at the end of the next 3 years. Then the firm expects a positive cash flow of $50,000 at the EOY 4 and positive cash flows of $250,000 at the EOY 5–9. Based on these estimates, would you invest money in this company if your MARR is 15% per year? (all sections).