Chapter 18, Problem 8P

a)

Summary Introduction

To determine: The net present value for a product line.

Introduction:

Weighted Average Cost of Capital (WACC) is the rate at which a company is expected to pay, on an average, to all the security holders in order to finance its assets.

Net present value is the difference between the present value of cash outflows and the present value of cash inflows over a specified period of time.

b)

Summary Introduction

To determine: The necessary debt Company M will take initially for launching a product line.

Introduction:

Debt is a sum of money borrowed by one person from another. Debt is borrowed by companies and individuals to make a large purchase or to develop business. Debt is an amount, which has to be repaid back at a later date, with interest.

Debt-to-equity ratio indicates how much debt a company uses to finance its assets relative to the value of shareholders’ equity. This ratio is calculated by dividing the company’s total liabilities by its shareholders’ equity; it is used to measure a company’s financial leverage.

c)

Summary Introduction

To determine: The reason for unlevered cost of capital of Company GY lesser than equity cost of capital and greater than its weighted average cost of capital.

Introduction:

Unlevered cost of capital is an assessment that uses either an actual debt-free or a hypothetical to measure a firm’s cost to implement a particular capital project. The unlevered cost of capital must demonstrate the project is less expensive than a levered cost of capital.