Gnomes R Us is considering a new project. The company has a debt-equity ratio of

Question

Gnomes R Us is considering a new project. The company has a debt-equity ratio of .87. The company’s cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier 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. Enter your answer as a percentage 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. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Project discount rate:

Gnomes R Us is considering a new project. The company has a debt-equity ratio of .87. The company’s cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier 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. Enter your answer as a percentage 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. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Project discount rate:

Explanation / Answer

Cost of equity 14.70% After tax cost of debt 8.00% Equity weight                                     0.53 1/1.87 Debt weight                                     0.47 0.87/1.87 WACC 11.58% Add: 4% 4% Relavant rate for project 15.58%

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