Hasco Corp. is a multinational provider of lumber and milling equipment. Currently, Hasco’s equity cost of capital is 13% and its borrowing cost is 7%. Hasco has a target leverage ratio of 35%. Hasco starts a new project which is developing a GPS-based inventory tracking system, which will be a separate division in Hasco. Management views the risk of this investment as similar to that of other technology companies’ investment. Suppose Hasco plans to finance the new division using 15% of debt financing (a constant debt value ratio of 15%) with a borrowing cost 8%, and its corporate tax rate is 35%. You have the following information about the comparable company to the new Hasco’s technology investment. (Comparable company: leverage ratio 20%, cost of equity 14%, cost of debt 10%, tax rate = 35%.) 

• Estimate the cost of capital of Hasco Corp (using traditional WACC equation) 

• Estimate the cost of capital of the new investment (using the two different equations for the cost of capital, which are traditional WACC equation and project based WACC equation.

Answer rating: 100% (QA)

Part A The traditional WACC can be calculated wi... View the full answer