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O Yes, if after-tax cost of debt (k) z 13.75% O No answer O No O Yes, if after-tax cost of debt (k) s 17.5% Yes, if after-tax cost of debt (k) s 13.75%

O Yes, if after-tax cost of debt (k) z 13.75% O No answer O No O Yes, if after-tax cost of debt (k) s 17.5% Yes, if after-tax cost of debt (k) s 13.75%

Essentials Of Investments
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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Kasbro nv, a company that is active in the toy industry, has optimized its capital structure: the company is financed 60% with equity and 40% with debt. Its market beta has been estimated to be 1.2. However, Kasbro nv considers executing a project in a -for the company- new business, being the snack food business. The expected internal rate of return (IRR) for the project is 16%. As Kasbro nv currently has no experience in this business, it decides to take a look at its competitors. Potatoes nv, a company that is active in the snack food sector and investing in similar projects, has a leveraged beta of 1.5. Potatoes nv has a capital structure consisting of 50% debt and 50% equity. The marginal tax rate of both companies is 40%. The risk-free rate is 7% and the market risk premium is 8%. Do you think the company should accept the project? Select the answer that comes closest. O Yes, if after-tax cost of debt (k) 2 13.75% O No answer O No O Yes, if after-tax cost of debt (k) s 17.5% O Yes, if after-tax cost of debt (k) s 13.75% Oolo
Transcribed Image Text:Kasbro nv, a company that is active in the toy industry, has optimized its capital structure: the company is financed 60% with equity and 40% with debt. Its market beta has been estimated to be 1.2. However, Kasbro nv considers executing a project in a -for the company- new business, being the snack food business. The expected internal rate of return (IRR) for the project is 16%. As Kasbro nv currently has no experience in this business, it decides to take a look at its competitors. Potatoes nv, a company that is active in the snack food sector and investing in similar projects, has a leveraged beta of 1.5. Potatoes nv has a capital structure consisting of 50% debt and 50% equity. The marginal tax rate of both companies is 40%. The risk-free rate is 7% and the market risk premium is 8%. Do you think the company should accept the project? Select the answer that comes closest. O Yes, if after-tax cost of debt (k) 2 13.75% O No answer O No O Yes, if after-tax cost of debt (k) s 17.5% O Yes, if after-tax cost of debt (k) s 13.75% Oolo
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