Marlow Chemicals: What Should This Project Have to Beat?
Marlow Chemicals is a specialty chemicals business in India. The board is being asked to approve a ₹209 Cr capacity expansion that the sponsoring team says will return 15.1%.
The CFO has been using a flat 12% hurdle rate for every proposal for the last four years. A new board member has challenged that, pointing out the capital structure has shifted and rates have moved since it was set.
Current position: the company is funded 29% debt and 71% equity. It borrows at 9.6% pre-tax and pays a 28% effective tax rate. The equity beta is 0.81, the risk-free rate is 6.6%, and the equity risk premium in this market is taken as 6.1%.
The project has roughly the same operating risk as the existing business.
proposal
- size cr
- 209
- claimed return pct
- 15.1
- legacy hurdle rate pct
- 12
cost inputs
- equity beta
- 0.81
- risk free rate pct
- 6.6
- effective tax rate pct
- 28
- equity risk premium pct
- 6.1
- pre tax cost of debt pct
- 9.6
derived hints
- wacc pct
- 10.2
- cost of equity pct
- 11.54
- after tax cost of debt pct
- 6.91
capital structure
- debt pct
- 29
- equity pct
- 71
Advise the board. Your answer should provide:
- Analysis — compute the cost of equity, the after-tax cost of debt, and the blended WACC. Show the arithmetic.
- Risks — what the single-hurdle-rate approach gets wrong, and what would move your number.
- Recommendation — the hurdle rate you would set and whether this project clears it.
State any assumptions you make.
80 points, 60% to pass.
- recommendation20
- market analysis15
- risk assessment20
- financial analysis25
Reveal suggested structure
CAPM for cost of equity, after-tax cost of debt, weight by capital structure, compare project return to WACC, then sensitise.