UV Company Has Just Been Formed with $100 Million in Equity

question 24

Essay

UV Company has just been formed with $100 million in equity capital to invest in five projects,all with infinite lives,with the following characteristics:
$\begin{array} { l c c } \text { project } & \text { return on equity } & \text { investment needs } \\\hline\text { A } & 14 \% & \$ 20 \text { million } \\\text { B } & 17 \% & \$ 15 \text { million } \\\text { C } & 11 \% & \$ 25 \text { million } \\\text { D } & 19 \% & \$ 20 \text { million } \\\text { E } & 10 \% & \$ 20 \text { million }\end{array}$

If all five projects have a beta of 1 and the riskless rate is 7%,what is the estimated price-to-book-value ratio of this firm assuming that all five projects are taken? (Assume market rate of return of 15% and the growth rate for the company is 20%)

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Definitions:

Perfect Competition

A market structure where many firms sell identical products, entry and exit are easy, and no single buyer or seller can affect prices.

Marginal Cost (MC)

The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.

Marginal Cost

The financial increment incurred by the production of an extra unit of a product or service.

Average Total Cost

It refers to the total cost per unit of output, calculated by dividing the total cost of production by the number of units produced.