The company has risk-free debt that costs 4% before taxes, and the expected rate of return of the stock market is 12%. DW is considering the acquisition of a new project in publishing business that is expected to yield 20% on after-tax operating cash flow. Penguin Publishing House, which has the same business model (and risk class) as the project being considered, has an equity beta of 1.5 and has no debt in its capital structure. Assume that the marginal tax rate for both companies is 40%. 1. What is the cost of capital of Penguin Publishing House? 2. If DW finances the new publishing project with 50% debt, what is the cost of capital of this project? 3. Under the estimated cost of capital, should DW take the project or n
The DW Media Group has an equity beta of 1.2 and 50% debt (debt over firm value) in its capital
structure. The company has risk-free debt that costs 4% before taxes, and the expected
of the stock market is 12%. DW is considering the acquisition of a new project in publishing business
that is expected to yield 20% on after-tax operating cash flow. Penguin Publishing House, which has
the same business model (and risk class) as the project being considered, has an equity beta of 1.5 and
has no debt in its capital structure. Assume that the marginal tax rate for both companies is 40%.
1. What is the cost of capital of Penguin Publishing House?
2. If DW finances the new publishing project with 50% debt, what is the cost of capital of this
project?
3. Under the estimated cost of capital, should DW take the project or not?
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