Project A is different than the normal project that the company has undertaken in previous years....

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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% 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 a. 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! b. Why is it important for the firm to use a risk adjusted discount rate for any projects the firm is analyzing? Firm's beta is 0.90 Tax rate 35.0% 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% 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 a. 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! b. Why is it important for the firm to use a risk adjusted discount rate for any projects the firm is analyzing? Firm's beta is 0.90 Tax rate 35.0%

Answer rating: 100% (QA)

a To determine whether to accept Project A we need to calculate the riskadjusted cost of capital for the project The riskadjusted cost of capital cons... View the full answer