. A firm with 25% Debt and 75% equity is considering a number of projects. Project W X Y Z Beta IRR 0.83 9.50% 0.92 9.25% 1.09 10.25% 1.35 12.50% The current risk free rate is 5% and the market risk premium is 7%. The company bond's YTM is 8%, and the company has a tax rate of 40%. Assume the projects will be financed using the ratio of debt and equity of the overall company and the cost of debt does not vary over the projects (this is not necessarily a valid assumption in the real world). (a) What is the WACC for each project? (b) Which projects should be accepted by using the individual WACC? (c) If instead management uses the company's overall WACC of 10% (and ignores the individual project WACCs), which projects would be incorrectly accepted or rejected?
. A firm with 25% Debt and 75% equity is considering a number of projects. Project W X Y Z Beta IRR 0.83 9.50% 0.92 9.25% 1.09 10.25% 1.35 12.50% The current risk free rate is 5% and the market risk premium is 7%. The company bond's YTM is 8%, and the company has a tax rate of 40%. Assume the projects will be financed using the ratio of debt and equity of the overall company and the cost of debt does not vary over the projects (this is not necessarily a valid assumption in the real world). (a) What is the WACC for each project? (b) Which projects should be accepted by using the individual WACC? (c) If instead management uses the company's overall WACC of 10% (and ignores the individual project WACCs), which projects would be incorrectly accepted or rejected?
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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Prepare an amortization schedule for a four-year loan of $40000. The interest rate is 8 percent per year, and the loan calls for equal annual payments. Rework it by assuming that the loan agreement calls for a principal reduction of $10000 every year instead of equal annual payments.
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Transcribed Image Text:10. A firm with 25% Debt and 75% equity is considering a number of projects.
Project
W
X
Y
Z
Beta IRR
0.83
9.50%
0.92
9.25%
1.09
10.25%
1.35
12.50%
The current risk free rate is 5% and the market risk premium is 7%. The company bond's YTM is
8%, and the company has a tax rate of 40%. Assume the projects will be financed using the ratio of
debt and equity of the overall company and the cost of debt does not vary over the projects (this is not
necessarily a valid assumption in the real world).
(a) What is the WACC for each project?
(b) Which projects should be accepted by using the individual WACC?
(c) If instead management uses the company's overall WACC of 10% (and ignores the individual
project WACCs), which proj would be incorrectly accepted or rejected?
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