QUESTION 5You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which is retail, and the other is manufacturing.ABC's debt-equity ratio (measured at market value) is one half. The company has $2.5 billion in face value of perpetual bonds whichpay an annual coupon of 4% and have a yield to maturity of 10%. ABC's equity has a beta of 1.25. The company faces a 35% taxrate.The risk-free rate of return is 5.6% and the market risk premium, over and above the risk-free rate, is 8%.The company is considering a business expansion in the retail industry. The expansion project will generate $20 million free cashflow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the expansion project.Companies that operate purely in the manufacturing industry have an average beta of 0.8 and an average debt-equity ratio(measured at market value) of three quarter.Companies that operate purely in the retail industry have an average beta of 1.8 and an average debt-equity ratio (measured atmarket value) of one quarter.What is ABC's weighted average cost of capital (WACC) for the capacity expansion project?a. 13.0%Ob.9.6%O c. 17.3%Od. 15.0%e. 12.6%

WACC = weight of equity*cost of equity + weight of debt*cost of debt cost of equity is calculated by…

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What is ABC's weighted average cost of capital (WACC) for the capacity expansion project? a. 13.0% O b.9.6% C. 17.3% d. 15.0% e. 12.6%

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

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