1) Caddie Manufacturing has a target debt-equity ratio of .75. Its cost of equity is 10 percent, and its pretax cost of debt is 6 percent. If the tax rate is 22 percent, what is the company’s WACC? 2) Gnomes R Us is considering a new project. The company has a debt-equity ratio of .76. The company’s cost of equity is 14.8 percent, and the aftertax cost of debt is 8.1 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? What discount rate should the firm use for the project?
1) Caddie Manufacturing has a target debt-equity ratio of .75. Its cost of equity is 10 percent, and its pretax cost of debt is 6 percent. If the tax rate is 22 percent, what is the company’s WACC? 2) Gnomes R Us is considering a new project. The company has a debt-equity ratio of .76. The company’s cost of equity is 14.8 percent, and the aftertax cost of debt is 8.1 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? What discount rate should the firm use for the project?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1) Caddie Manufacturing has a target debt-equity ratio of .75. Its
2) Gnomes R Us is considering a new project. The company has a debt-equity ratio of .76. The company’s cost of equity is 14.8 percent, and the aftertax cost of debt is 8.1 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?
What discount rate should the firm use for the project?
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