The project agreed by the equity holder. Introduction: Equity is the total value of assets less than the total amount of all liabilities in a company. 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 that has to be repaid back at a later date, with interest.

Question

Gnomes R Us is considering a new project. The company has a debt-equity ratio of .86. The company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. a. What is the company's WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What discount rate should the firm use for the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. WACC b. Project discount rate %

Answer 1

Question

Chapter 16, Problem 19P

a)

Summary Introduction

To determine: The project agreed by the equity holder.

Introduction:

Equity is the total value of assets less than the total amount of all liabilities in a company.

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 that has to be repaid back at a later date, with interest.

b)

Summary Introduction

To determine: The cost of firm’s debt project

Introduction:

The effective tax rate is the normal tax assessment rate for a partnership or person. The effective tax rate for people is the normal rate at which their earned income is taxes, and the effective tax rate for an organization is the normal rate at which its pre-charged taxes are taxed.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

Gnomes R Us is considering a new project. The company has a debt-equity ratio of .86. The company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. a. What is the company's WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What discount rate should the firm use for the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. WACC b. Project discount rate %

B Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.6, an equity beta of 1.6, and a debt beta of 0.5. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project 1 Investment 100 NPV 23 4 5 2 3 75 120 60 80 12 18 15 14 (All amounts are in Smillions.) The total debt overhang associated with accepting project 1 is closest to ($ million) (2 decimal places):

Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 2, and a debt beta of 0.2. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project 1 4 2 3 75 120 60 Investment 100 NPV 23 12 (All amounts are in $millions.) 5 80 18. 15 14 Nielson Motors should accept those projects with profitability indices greater than (2 decimal places):