The Weston Enchilada Company has a levered equity beta of 0.8. The Company is thinking about getting into the Whataburger business.  Currently, Weston Enchilada is financed with 50% long term debt. The debt is risk free and pays 4% interest before taxes. A little research suggests that the Whataburger business is expected to yield 16% on after tax total operating cash flows.  

For comparison, another whataburger in town has an equity beta of 2.5 but has 20% debt in its capital structure. You can assume that the market return is 12%, marginal tax rates on everything are 35%, and the new project would be financed with 50% debt.

Find the WACC for the new whataburger venture and decide what Weston Enchilada should do?

Answer rating: 100% (QA)

Reject project as return of 16 is less than WACC Explanation File Paste K11 45678 Home Insert Page L... View the full answer