Project A is different than the normal project that the company has undertaken in previous years. You have the following observations from the market:

Government t-bills are yielding 4% TSX return is 14% Firms beta is 0.90

The firm has a tax rate of 40%. A new debt issue will be sold at par with an 8% coupon.

You remember your professor mentioning something about a pure play company in class. Your research in the market has provided information about a company that is in the same type of industry as project A.

Pure Play Information Beta 1.2 Debt-to-equity ratio 2 Tax rate 35.0%

1. Project A has an IRR of 9.70%. Using a debt-to-equity ratio of 1 and a risk adjusted cost of capital for project A, would you accept the project? Show your work! (5 marks)
2. Why is it important for the firm to use a risk adjusted discount rate for any projects the firm is analyzing? (2 marks)