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
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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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.
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
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