Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com- pany is now evaluating a new venture into home computer systems. The internal rate of return on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend to average around 14%. (LO13-2) a. What is Universal's WACC? b. Will Universal make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC? c. Should the new project be pursued?
Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com- pany is now evaluating a new venture into home computer systems. The internal rate of return on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend to average around 14%. (LO13-2) a. What is Universal's WACC? b. Will Universal make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC? c. Should the new project be pursued?
Chapter18: The Management Of Accounts Receivable And Inventories
Section: Chapter Questions
Problem 10P
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![14. Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently
selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com-
pany is now evaluating a new venture into home computer systems. The internal rate of return
on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend
to average around 14%. (LO13-2)
a. What is Universal's WACC?
b. Will Universal make the correct decision if it discounts cash flows on the proposed venture
at the firm's WACC?
c. Should the new project be pursued?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb5886273-d22c-4d26-9ada-cc4cdd6536ba%2Fa87b69ca-870c-4e88-9587-2d552ac96450%2Fgobl3qr_processed.jpeg&w=3840&q=75)
Transcribed Image Text:14. Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently
selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com-
pany is now evaluating a new venture into home computer systems. The internal rate of return
on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend
to average around 14%. (LO13-2)
a. What is Universal's WACC?
b. Will Universal make the correct decision if it discounts cash flows on the proposed venture
at the firm's WACC?
c. Should the new project be pursued?
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