Burger World Inc considers an expansion project. It currently has 10 million outstanding shares trading at $30 per share. Equity has an estimated beta of 1.5. The risk-free rate is 2.5%, while the market risk premium is 5%. It also has 200,000 outstanding bonds with 20 years to maturity, 8% coupon rate, $1,000 par, currently trading at par. The corporate tax rate is 25%. The project will require an investment if $100 million and will produce a net after tax cash flow of $15 million per year for 20 years. Calculate the WACC (Weighted Average Cost of Capital), the project NPV and determine whether Burger World should accept the project?

Answer rating: 100% (QA)

First lets calculate the cost of equity using the Capital Asset Pricing Model CAPM Cost of equity Ri... View the full answer