Q1. You are a senior manager at anautomobile company. In an effort to offer a full menu of auto andgas products, your firm is considering an oil exploration project.The CEO has selected the manager of the company’s truck division tooversee the project, and has asked you to evaluate whether thecompany should proceed with the exploration or not.
To help you evaluate the project, yourassociate gives you the following information:
Company | Equity beta | D/(D+E) |
General American Oil | 1.6 | 0.05 |
Lousiana Land & Exploration | 1.2 | 0.20 |
Mesa Petroleum | 2.6 | 0.15 |
Murphy Oil | 1.7 | 0.30 |
Natomas Oil | 1.8 | 0.45 |
Oceanic Exploration | 1.5 | 0.24 |
Superior Oil | 1.3 | 0.13 |
- Should you also ask the associate for similar information oncar manufacturers? On truck manufacturers? On automobile companies?Why or why not?
- Based on the information you have available, calculate anappropriate discount rate assuming for the project that risk freerate is 4%, the expected market return is 8%, and the corporate taxrate is 20%. Assume that the oil exploration project is 84% equityfinanced.(please show me the detail calculation and steps. )(50points)
assume cost of debt (return on debt) = risk free rate.
