You have commenced your first full-time job and your boss has asked for your help to determine

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Question:

You have commenced your first full-time job and your boss has asked for your help to determine the cost of capital for a new project. The company NowTech Inc you work for specializes in sustainable technologies. They are considering investing in a new project to develop a biodegradable alternative to plastic wrap. They need you to calculate an appropriate discount rate, or weighted average cost of capital (WACC), to evaluate the project's net present value (NPV).

Your manager believes that this project is riskier than their previous projects due to the newness of the technology and the potential market competition. As such, they have asked you to use an adjustment factor of 3% to account for this risk.

You find the following market information:

• NowTech Inc. currently has 50,000 semi-annual coupon bonds, which currently sell for 98% of par. The yield to maturity of the bonds is quoted as 5.25%.

• NowTech Inc. has another set (20,000) of bonds that are not publicly traded. These bonds were issues prior to the other bonds and have priority payment in case of bankruptcy and thus have a higher credit rating. They sell at par with an interest rate of 5.1%.

• NowTech Inc. has 100,000 ordinary shares outstanding. The last dividend paid was $2.50 and dividends are expected to grow at a rate of 8% per annum indefinitely. The beta of the shares is 1.25. The market return is 9% and the risk-free rate is 2.5%.

1) If the corporate tax rate is 25%, what is the discount rate NowTech Inc. should use to evaluate this project? (Make sure to upload your workings under the File Response at the bottom of the test.

2) Explain what other adjustments or approaches NowTech could use to account for the project not being equally risky to the other projects the company has.