Zoombie Brewery is considering a project with estimated operating income of $40M per year. The project's unlevered cost of capital is 9.9%, the cost of debt is 7.9%, the debt-equity ratio is 1.9, and the tax rate is 40%. What is the relevant cost of capital if the APV method is used?

Zoombie Brewery is considering a project with estimated operating income of $40M per year. The project's unlevered cost of capital is 9.9%, the cost of debt is 7.9%, the debt-equity ratio is 1.9, and the tax rate is 40%. What is the relevant cost of capital if the APV method is used?

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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Walsh Company is considering three independent projects, each of which requires a $3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Cost of capital Project M (medium risk): Project L (low risk): Cost of capital Cost of capital = 15% = 11% = 8% IRR = 19% IRR = 12% IRR = 7% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $4,443,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. %
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