A firm with a corporatewide debt-to-equity ratio of 1:2, an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12%. The after-tax cost of debt is expected to remain at 7%. What is the project’s weighted average cost of capital? How does it compare with the parent’s WACC?
A firm with a corporatewide debt-to-equity ratio of 1:2, an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12%. The after-tax cost of debt is expected to remain at 7%. What is the project’s weighted average cost of capital? How does it compare with the parent’s WACC?
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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A firm with a corporatewide debt-to-equity ratio of 1:2,
an after-tax cost of debt of 7%, and a
debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the
required
The after-tax cost of debt is expected to remain at 7%.
What is the project’s weighted average cost of capital? How
does it compare with the parent’s WACC?
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