Example: Comparision company (pure play) approach General Conglomerates evaluates an oil exploration project proposed by the manager of its aviation division. Calculate the correct discount rate to use to evaluate the project. Assume that there are no taxes and all debt is risk free. The risk free rate is 7% and the market risk premium equals 8%. Company General American Oil Louisiana Land and Expl. Mesa Petroleum Murphy Oil Natomas Oceanic Exploration Superior Oil Equity Beta 1.81 1.29 2.36 1.60 1.84 1.53 1.35 E/(D+E) 0.85 0.88 0.63 0.73 0.65 0.77 0.84

Example: Comparision company (pure play) approach General Conglomerates evaluates an oil exploration project proposed by the manager of its aviation division. Calculate the correct discount rate to use to evaluate the project. Assume that there are no taxes and all debt is risk free. The risk free rate is 7% and the market risk premium equals 8%. Company General American Oil Louisiana Land and Expl. Mesa Petroleum Murphy Oil Natomas Oceanic Exploration Superior Oil Equity Beta 1.81 1.29 2.36 1.60 1.84 1.53 1.35 E/(D+E) 0.85 0.88 0.63 0.73 0.65 0.77 0.84

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 18P

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