Tim works for HydroTech, a manufacturer of high-pressure industrial water pumps. He reports directly to the CFO, and she has asked him to calculate HydroTech's WACC. He has gathered the following information about HydroTech: its market capitalization (its market value of equity) is $130 million, its beta is 1.2, the total book value of its debt is $40 million, it has $20 million cash, and its cost of debt (using the quoted yields on HydroTech's outstanding bond issues) is 4%. In addition, the yield of the 10-year government bond (the risk-free rate) is 2%, the market risk premium is 4%, and the marginal corporate tax rate is 35%. Calculate HydroTech's WACC. When is it appropriate to use this WACC to evaluate a new project? Calculate Hydro Tech's WACC. WACC=% (Round to two decimal places.) When is it appropriate to use this WACC to evaluate new project? OA. HydroTech should use this WACC to evaluate projects that are average risk and will be financed in the same ways as HydroTech is financed. O B. HydroTech should use this WACC to evaluate projects that are above average risk and have a larger book value of debt value than Hydro Tech. OC. HydroTech should use this WACC to evaluate projects that are below average risk and have a smaller cost of debt rate than HydroTech. OD. HydroTech should use this WACC to evaluate projects that are average risk and have a smaller beta value than HydroTech.
Tim works for HydroTech, a manufacturer of high-pressure industrial water pumps. He reports directly to the CFO, and she has asked him to calculate HydroTech's WACC. He has gathered the following information about HydroTech: its market capitalization (its market value of equity) is $130 million, its beta is 1.2, the total book value of its debt is $40 million, it has $20 million cash, and its cost of debt (using the quoted yields on HydroTech's outstanding bond issues) is 4%. In addition, the yield of the 10-year government bond (the risk-free rate) is 2%, the market risk premium is 4%, and the marginal corporate tax rate is 35%. Calculate HydroTech's WACC. When is it appropriate to use this WACC to evaluate a new project? Calculate Hydro Tech's WACC. WACC=% (Round to two decimal places.) When is it appropriate to use this WACC to evaluate new project? OA. HydroTech should use this WACC to evaluate projects that are average risk and will be financed in the same ways as HydroTech is financed. O B. HydroTech should use this WACC to evaluate projects that are above average risk and have a larger book value of debt value than Hydro Tech. OC. HydroTech should use this WACC to evaluate projects that are below average risk and have a smaller cost of debt rate than HydroTech. OD. HydroTech should use this WACC to evaluate projects that are average risk and have a smaller beta value than HydroTech.
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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Transcribed Image Text:Tim works for HydroTech, a manufacturer of high-pressure industrial water pumps. He reports directly to the CFO, and she has asked him to calculate HydroTech's WACC. He has gathered the
following information about HydroTech: its market capitalization (its market value of equity) is $130 million, its beta is 1.2, the total book value of its debt is $40 million, it has $20 million cash,
and its cost of debt (using the quoted yields on HydroTech's outstanding bond issues) is 4%. In addition, the yield of the 10-year government bond (the risk-free rate) is 2%, the market risk
premium is 4%, and the marginal corporate tax rate is 35%. Calculate HydroTech's WACC. When is it appropriate to use this WACC to evaluate a new project?
Calculate HydroTech's WACC.
WACC =
(Round to two decimal places.)
When is it appropriate to use this WACC to evaluate a new project?
OA. HydroTech should use this WACC to evaluate projects that are average risk and will be financed in the same ways as HydroTech is financed.
OB. HydroTech should use this WACC to evaluate projects that are above average risk and have a larger book value of debt value than HydroTech.
00
C. HydroTech should use this WACC to evaluate projects that are below average risk and have a smaller cost of debt rate than Hydro Tech.
D. HydroTech should use this WACC to evaluate projects that are average risk and have a smaller beta value than HydroTech.
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