Hi, I’m working on a strategic finance problem and would like so assistance unpacking it. The problem is below: Dow Chemical (Dow) is evaluating a…

Hi,

I’m working on a strategic finance problem and would like so assistance unpacking it. The problem is below:

Dow Chemical (Dow) is evaluating a new project that costs R489, 000,000. The project will be financed using 60% equity and 40% debt, thus maintaining the company’s current debt-to-equity ratio. The company’s stakeholders have a required rate of return of 15% while bondholders expect a 10% rate of return. The project is expected to generate annual cash flows of R14, 000,000 before taxes for the next two decades. Dow is in the 30% tax bracket.

Required:

  • Determine the weighted average cost of capital of the company
  • Calculate the traditional net present value of the project and recommend whether or not the project should be undertaken
  • Using Modiglani and Miller’s Proposition II, determine the required return of unlevered equity
  • Determine whether or not the project should be undertaken using the adjusted present value method
  • Recommend whether or not the project should be undertaken using the flow-to-equity method for your calculations

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Assignment Solutions
Assignment Solutions