a new project. The company has a debt-equity ratio of 79. The company\'s cost of

Question

a new project. The company has a debt-equity ratio of 79. The company's cost of equity is 14.5 percent, and the atertax cost of debt is 7.8 percent. The firm eels that the project is nskier than the company as a whole and that it should use an adjustment factor of +4 percent What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC What discount rate should the firm use for the project? (Do not round intermediate calculations and enter your answer a Project discount rate % s a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

WACC = rD (1- Tc )*( D / V )+ rE *( E / V )

Where...

rD*(1-T) = After tax cost of debt = 7.8%
(D/V) = (Debt/Total Value) = 0.79/1.79
rE= the firm's cost of equity = 14.5%
(E/V) = (Equity/Total Value) = 1/1.79

WACC = 1/1.79*0.145 + 0.79/1.79*0.078 = 0.1154 = 11.54%

Discount rate = WACC + 4% = 11.54%+4% = 15.54%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.