In problem 4, assume that Lumin Telecomm has a beta of 2.0 currently and that you expect it to drop.

In problem 4, assume that Lumin Telecomm has a beta of 2.0 currently and that you expect it to drop in linear increments to 1.2 by year 5. If the current cost of borrowing is 9% and you expect this to remain unchanged over the next five years, estimate the cost of capital for the firm each year for the next five years. (The risk-free rate is 5.6%, and the risk premium is 4%.) The debt ratio is expected to decline from 70% in the current year to 50% in year 5 in linear increments. PROBLEM 4 : Lumin Telecomm produces specialized telecommunication equipment and has made losses each year over the

»In problem 4, assume that Lumin Telecomm has a beta of 2.0 currently and that you expect it to drop in linear increments to 1.2 by year 5. If the current cost of borrowing is 9% and you expect this to remain unchanged over the next five years, estimate the cost of capital for the firm each year for the next five years. (The risk-free rate is 5.6%, and the risk premium is 4%.) The debt ratio is expected to decline from 70% in the current year to 50% in year 5 in linear increments. PROBLEM 4 : Lumin Telecomm produces specialized telecommunication equipment and has made losses each year over the three years it has been in existence—it has an accumulated net operating loss of $180 million. In the most recent year, the firm reported an operating loss of $90 million on revenues of $1 billion. If you expect the growth rate in revenues to be 20% a year for the next five years, and the pretax operating margin to be -6% next year, -3% two years from now, 0% the year after, 6% in four years, and 10% in five years (tax rate = 40%), estimate: a. The revenues and pretax operating income each year for the next five years. b. The taxes you would have to pay and your after-tax operating income each year for the next five years.

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