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Gross Present Value and Beta Factor - Michael - 08-20-2010
Hi, I am supposed to repeat a Financing Management Module and I am a bit stuck with the following question, I am not too sure how to deal with the Beta Factor? Any help is greatly appreciated. -------------------------------------------------------------------- Question Alpha plc has an opportunity to invest in a project that would last one year. Lamda plc has three projects, each of which would last for a year. The three projects are located within different industrial sectors. It is expected that, over the coming year, the market rate of return will be 6% and the risk-free rate of interest will be 2%. The projectsâ anticipated net cash flows (forecast to be receivable at the end of the year), together with their corresponding beta factors are as follows Alpha plc Â£000 | Beta factor 1,000 | 1.3 Lamda plc Â£000 | Beta factor 400 | 1.4 200 | 0.7 400 | 1.5 Required (a) Calculate the gross present value of the projects that can be undertaken by Alpha plc and Lamda plc; (b) Calculate the beta factor for the three-project portfolio open to Lamda plc; - ciapk - 10-04-2010
Dear Michal, When any company wish to start a project other then existing sector or other such an investment changes its Business as well as Financial Risks thats why current WACC could not be used as relevant discount factor to calculate relevant NPV of the Project. We have to calculate Risk Adjusted WACC (Project Specific WAAC). In this context, Beta is the relevant risk of the project that is to be incorporated in the current WACC to make a relevant discount rate. Best Regards, |