Chapter 18, Problem 9P

a)

Summary Introduction

To determine: The net present value of the new 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 outflow and present value of cash inflow 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 a 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.

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

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