A company owns a plot of land in downtown Dallas. The company has two mutually exclusive projects that it can build on this plot of land. The company’s cost of capital is 8%. Project A is a Thai restaurant. Project B is a hotel. The proposal for the Thai restaurant has an IRR of 11% and an NPV of $100 million. The proposal for the hotel has an IRR of 20% and an NPV of $20 million. Which of the two projects should the company implement? Explain your decision.
2. MNL stock is currently selling for $25 per share. MNL bonds are zero-coupon bonds that currently trade at $600 per bond, mature in 10 years, and have a face value of $1,000. The beta for MNL’s stock is 0.9. The yield on a 10-year Treasury bond is 2.5%. The expected return for the stock market is 11%. The stock market has had an average annual return of 14% during the past 5 years. MNL is in the 25% tax bracket. There are 25,000 bonds outstanding as well as 2,000,000 common shares.
a.) Using the CAPM approach, what is the estimate for the cost of equity for MNL?
b.) What is the estimate for the after-tax cost of debt for MNL?
c.) What are the estimated weights to be used when calculating the WACC? d.) What is the best estimate of the WACC for MNL?
