U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.2. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate of return of 23 percent. USR wishes to evaluate this investment proposal. If the investment is made, USR intends to finance the project with the same capital structure as its current business. USR's marginal tax rate is 34 percent. USR has identified three firms that are primarily in the line of business into which USR proposes expanding. Their average beta is 1.5, and their average capital structure is 45 percent common equity and 55 percent debt. The marginal tax rate for these three firms averages 40 percent. The risk-free rate is 6 percent, and the expected market risk premium is 8.6 percent. Should USR undertake the project? Round your answer to one decimal place.

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
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U.S. Robotics (USR) has a current (and target)
capital structure of 70 percent common equity
and 30 percent debt. The beta for USR is 1.2.
USR is evaluating an investment in a totally
new line of business. The new investment has
an expected internal rate of return of 23
percent. USR wishes to evaluate this
investment proposal. If the investment is
made, USR intends to finance the project with
the same capital structure as its current
business. USR's marginal tax rate is 34
percent. USR has identified three firms that
are primarily in the line of business into which
USR proposes expanding. Their average beta
is 1.5, and their average capital structure is 45
percent common equity and 55 percent debt.
The marginal tax rate for these three firms
averages 40 percent. The risk-free rate is 6
percent, and the expected market risk
premium is 8.6 percent. Should USR
undertake the project? Round your answer to
one decimal place.
The project should be accepted for any after-
tax cost of debt of ___%
Transcribed Image Text:U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.2. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate of return of 23 percent. USR wishes to evaluate this investment proposal. If the investment is made, USR intends to finance the project with the same capital structure as its current business. USR's marginal tax rate is 34 percent. USR has identified three firms that are primarily in the line of business into which USR proposes expanding. Their average beta is 1.5, and their average capital structure is 45 percent common equity and 55 percent debt. The marginal tax rate for these three firms averages 40 percent. The risk-free rate is 6 percent, and the expected market risk premium is 8.6 percent. Should USR undertake the project? Round your answer to one decimal place. The project should be accepted for any after- tax cost of debt of ___%
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