Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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You try to evaluate an investment project for a company. A firm (Firm i) uses $38 million of debt and $15 million of preferred stock. The current market price of common stock is $20 with 4,125,000 shares outstanding. The new issue of common has used recently to finance a number of its recent operating asset purchases. If the before-tax cost of debt is 8% and its cost of preferred stock is 10%. The risk free rate is assume to be 5%, while the market risk premium is 8%, with an above market level firm beta of 1.25 (slightly more volatile than the market). Assume the corporate tax rate for this firm is 35%.  

  1. What is the Weighted Average Cost of Capital (WACC), Answer:

    2. Why would this WACC serve as an improvement of something as simple as the discount rate?

     3. If an investment project generates a return of 11% and has similar risk level as the overall company, would you accept or reject this project? Why or why not?

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