b. Lucky Motors has a different WACC for each of three types of projects. Low-risk projects...
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b. Lucky Motors has a different WACC for each of three types of projects. Low-risk projects have a WACC of 8.00%, average-risk projects a WACC of 10.00%, and high-risk projects a WACC of 12%. Which of the following projects do you recommend the firm to accept? Why? Project A B C D E F G Level of Risk Low Average Average Low High High Average IRR 9.50% 8.50% 7.50% 9.50% 14.50% 17.50% 11.50% (5 marks) c. Johnson's Diner has Weighted Average Cost of Capital (WACC) of 10.08%. The company has a capital structure consisting of 70% equity and 30% debt, a cost of equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of 30%. Johnson is considering expanding by building a new diner in a distant city and considers the project to be riskier than his current operation. He estimates his existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.40. Given this information, and assuming the cost of debt will not change if Johnson undertakes the new project, what adjusted WACC should he use in his decision- making? (5 marks) b. Lucky Motors has a different WACC for each of three types of projects. Low-risk projects have a WACC of 8.00%, average-risk projects a WACC of 10.00%, and high-risk projects a WACC of 12%. Which of the following projects do you recommend the firm to accept? Why? Project A B C D E F G Level of Risk Low Average Average Low High High Average IRR 9.50% 8.50% 7.50% 9.50% 14.50% 17.50% 11.50% (5 marks) c. Johnson's Diner has Weighted Average Cost of Capital (WACC) of 10.08%. The company has a capital structure consisting of 70% equity and 30% debt, a cost of equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of 30%. Johnson is considering expanding by building a new diner in a distant city and considers the project to be riskier than his current operation. He estimates his existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.40. Given this information, and assuming the cost of debt will not change if Johnson undertakes the new project, what adjusted WACC should he use in his decision- making? (5 marks)
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B Given Lucky motors has different projects for each of three type of projects WACC of those project... View the full answer
Related Book For
Applied Regression Analysis and Other Multivariable Methods
ISBN: 978-1285051086
5th edition
Authors: David G. Kleinbaum, Lawrence L. Kupper, Azhar Nizam, Eli S. Rosenberg
Posted Date:
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