The Knight Corporation, a publishing firm, is considering undertaking a new project in compute software. The company currently has a leverage of 0.5, and intends to keep the capital structure indefinitely. The company's cost of debt is 5% and has an equity beta of 1 for the existing business. The new project is expected to have the following cash flows.

Year 0	Year 1	Year 2
-1000	500	650

On the other hand, the Day Corporation is currently doing business similar to the new project that the Knight Corporation is considering. The Day Corporation has a leverage of 1, and equity beta of 2.4. The corporate tax rate is 21%. The riskfree rate is 1%, and the market risk premium is 7%. Assume debt beta is zero for all debt.

a. What is the WACC for the existing business of the Knight Corporation?

b. What is the NPV of the project using the discount rate for the existing business?

c. What is the cost of equity for the new project of the Knight Corporation using the Day Corporation as a comparable firm?

d. What should be the discount rate for the new project?

e. What should be the NPV of the project?

f. The Knight Corporation should accept the new project.

Group of answer choices

True

False

Answer rating: 100% (QA)

a To calculate the weighted average cost of capital WACC for the existing business of the Knight Corporation we need to determine the weights of debt ... View the full answer