Orange Inc., an orange juice producer with a current debt-to-equity ratio of 2, is considering expanding its operations to produce toothpaste Unsurprisingly, the toothpaste industry faces a different set of risks than the orange juice industry. However, the executives at Orange Inc. observe that Paste Inc., a toothpaste company, has a cost of equity of 12%, a cost of debt of 6%, and a debt-to-value ratio of 40%. Orange Inc. plans to finance its expansion into toothpaste production with 50% debt and 50% equity. The cost of debt for Orange Inc. is also 6%, and the corporate tax rate is 25%. Solve for the discount rate that Orange Inc. should use when evaluating whether to go forward with the expansion. Note: Orange Inc. does not want to use the Adjusted Present Value method. Appropriate Rate = 12.08% Appropriate Rate = 9.60% 13.20% Appropriate Rate 8.85% Appropriate Rate
Orange Inc., an orange juice producer with a current debt-to-equity ratio of 2, is considering expanding its operations to produce toothpaste Unsurprisingly, the toothpaste industry faces a different set of risks than the orange juice industry. However, the executives at Orange Inc. observe that Paste Inc., a toothpaste company, has a cost of equity of 12%, a cost of debt of 6%, and a debt-to-value ratio of 40%. Orange Inc. plans to finance its expansion into toothpaste production with 50% debt and 50% equity. The cost of debt for Orange Inc. is also 6%, and the corporate tax rate is 25%. Solve for the discount rate that Orange Inc. should use when evaluating whether to go forward with the expansion. Note: Orange Inc. does not want to use the Adjusted Present Value method. Appropriate Rate = 12.08% Appropriate Rate = 9.60% 13.20% Appropriate Rate 8.85% Appropriate Rate
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter21: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....
Related questions
Question
Please show all equations and work as needed. Make the correct answer clear. If possible, please type work so it can be copied. Thank you.
![Orange Inc., an orange juice producer with a
current debt-to-equity ratio of 2, is considering
expanding its operations to produce toothpaste
Unsurprisingly, the toothpaste industry faces a
different set of risks than the orange juice
industry. However, the executives at Orange Inc.
observe that Paste Inc., a toothpaste company,
has a cost of equity of 12%, a cost of debt of 6%,
and a debt-to-value ratio of 40%. Orange Inc.
plans to finance its expansion into toothpaste
production with 50% debt and 50% equity. The
cost of debt for Orange Inc. is also 6%, and the
corporate tax rate is 25%. Solve for the discount
rate that Orange Inc. should use when evaluating
whether to go forward with the expansion.
Note: Orange Inc. does not want to use the
Adjusted Present Value method.
Appropriate Rate = 12.08%
Appropriate Rate = 9.60%
13.20%
Appropriate Rate
8.85%
Appropriate Rate](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8f03175f-1487-44fb-b29d-0ffb9a077121%2Fc394924b-8e70-4de0-b27c-149d5041106e%2Fs32ycd5.jpeg&w=3840&q=75)
Transcribed Image Text:Orange Inc., an orange juice producer with a
current debt-to-equity ratio of 2, is considering
expanding its operations to produce toothpaste
Unsurprisingly, the toothpaste industry faces a
different set of risks than the orange juice
industry. However, the executives at Orange Inc.
observe that Paste Inc., a toothpaste company,
has a cost of equity of 12%, a cost of debt of 6%,
and a debt-to-value ratio of 40%. Orange Inc.
plans to finance its expansion into toothpaste
production with 50% debt and 50% equity. The
cost of debt for Orange Inc. is also 6%, and the
corporate tax rate is 25%. Solve for the discount
rate that Orange Inc. should use when evaluating
whether to go forward with the expansion.
Note: Orange Inc. does not want to use the
Adjusted Present Value method.
Appropriate Rate = 12.08%
Appropriate Rate = 9.60%
13.20%
Appropriate Rate
8.85%
Appropriate Rate
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT