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Category > Management Posted 09 Feb 2018 My Price 6.00

Dhatu Industries Limited

Dhatu Industries Limited is a manufacturer of iron and steel. It has an equity beta of 1.10. The target debt-equity ratio of the company is 2:1. The company is intending to diversify into different lines of businesses. It is considering a cement project requiring an investment of Rs 105 crore. The company will be able to raise Rs 70 crore loan from a financial institution at 10 per cent p.a. The loan is repayable at the end of 5 years. The project is expected to generate annual profit before interest and taxes of Rs 22 crore for 7 years. Assume that the project’s cost can be depreciated over its life of 7 years on the straight-line basis. The company has identified one public limited cement company as a proxy for the project. This company has an equity beta of 1.3 and debt-equity ratio of 1.5:1. The risk-free rate is 7 per cent and the market risk premium is 8 per cent. The corporate tax rate is 30 per cent. Should Dhatu undertake the cement project?

 

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Maurice Tutor
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Status NEW Posted 09 Feb 2018 10:02 PM My Price 6.00

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