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Clove Ancillary Ltd. owns several big box stores in shopping centres throughout Australia. Each store has two divisions: White Goods and Computers.

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Clove Ancillary Ltd. owns several big box stores in shopping centres throughout Australia. Each store has two divisions: White Goods and Computers.

Clove Ancillary Ltd. owns several big box stores in shopping centres throughout Australia. Each store has two divisions: White Goods and Computers. You have the following information about Clove Ancillary Ltd.:

White Goods Division: Market value of net assets = $3billion, asset beta = 1.2. Computer Division: Market value of net assets = $5billion, asset beta = 1.8.

Clove Ancillary has debt outstanding with a market value of $2billion and a market yield of 3%. This debt has a beta of zero.

Clove Ancillary has 100million outstanding common shares. The most recent dividend was per share. Analyst consensus forecasts indicate that this level of dividend payment should continue without growth indefinitely.

The risk free interest rate is 3% per annum and the required return on the market portfolio is 9% per annum. Clove Ancillary faces a 30% corporate tax rate.

  1. What is the beta of Clove Ancillary shares?
  2. What is the required return on Clove Ancillary shares?
  3. What is the current share price of Clove Ancillary shares?
  4. What is the probability of default of Clove Ancillary Ltd. debt?
  5. What is Clove Ancillary’s weighted average cost of capital?
  6. Clove Ancillary is evaluating a new store that will sell both white goods and computers in the same proportion as current stores. It is anticipated that this new store will be financed by a combination of debt and equity such that the capital structure of Clove Ancillary will not change. The new store will cost $3,500,000 to construct and will generate free cash flows of $325,000 per year in perpetuity. What is the NPV of this new store? 

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