Question: FINA Corp. is considering two potential projects. One is to further develop its current auto parts. The other project is to enter a new industry

FINA Corp. is considering two potential projects. One is to further develop its current auto parts. The other project is to enter a new industry of kitchen appliances. FINA Corps beta without the new project is 1.2. The market risk premium is 7%. The risk free rate is 3%. The total shares outstanding of FINA is 20 million. The stock price now is $5 per share. Tax rate is 35%. Following three firms are in the new industry that FINA wants to enter. Firm A is a competitor of FINA in auto parts. Firm A also has a division in kitchen appliances. Firm B is producing kitchen appliances and all kinds of furniture. Firm C is in kitchen appliances business only.

Firm WACC D/E Cost of Debt Tax Rate

A 10% 0.8 3% 30%

B 11% 1.0 3% 30%

C 10% 0.5 3% 35%

a. Which one should be used as a reference to calculate the WACC of the new business project?

b. What is the WACC of the project to enter kitchen appliances market?

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