Finance Assignment | Homework For You

The Randolf Corporation is considering an investment of $70 million to manufacture electric toothbrushes. The project will generate a cash flow in year 1 of S 10 million and future cash flows are expected to grow at 3% per year in perpetuity. Randolf does not pay taxes.

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a. (4 marks) What criterion should Randolf use to make its capital budgeting decision?

h. (4 marks) What other criteria are sometimes used to make capital budgeting decisions? Describe very briefly why Randolf should use the method you gave as an answer to (a) rather than these other methods.

Randolf is financed with debt and equity. The current market value of its equity is $600 million and its debt-to-equity ratio, which it intends to maintain at the same level in the future. is two-thirds (2/3).

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c. (12 marks) The table below gives an estimate of Randolf s equity beta along with some other market data. Should Randolf go ahead with the investment?

Beta of Randolf Equity Treasury yield-to-maturity (10-year) Yield-to-maturity (10-year) Randolf Debt

Equity Martket risk premium (100 years) Geometric mean Arithmetic mean

1.2 5.50% 6.50%



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