Your company, Magnocompulsion Inc., is considering starting a division that makes a new kind of electric motor for electric cars Magnocompulsion has spent $20,000,000 on R&D I believes that the new electric motor will be more efficient and cost less to build. The R&D cannot be sold because it is specific to Magnocompulsion. A large plant that Magnocompulsion owns would be used by the project. The plant could otherwise be sold today for $42,000,000 net of taxes. Your company's debt ratio will be 78% The marginal corporate tax rate is 21%.

There is a publicly traded company called Eleccentric Inc. that you believe is most comparable to your project. They have a debt ratio of 42%. The yield to maturity on their debt is 7.73%. With a debt ratio of 78%, you think that the yield to maturity on their debt would be 10.10%. They also have a marginal tax rate of 21%. Their stock beta is 1.6. The expected return on the market is 9,21%, and the risk-free rate of Interest is 2.21%

An opportunity cost of the project is

Select one:

A. There are no opportunity costs.

B. The $20,000,000 expenditure on R&D.

C. The $42,000,000 plant.

D. Both the 20,000,000 expenditure on R&D and the $42,000,000 plant.

A sunk cast of the project is

Select one:

A. There are no sunk costs.

B. The $20,000,000 expenditure on R&D.

C. The $42,000,000 plant.

D. Both the 20,000,000 expenditure on R&D and the $42,000,000 plant.

Rs (the required return on the stock) for Eleccentric is: ?

Ro (the unlevered required return on the stock) for Eleccentric is: ?

Rg (the required return on the stock) for Magnocompulsion is

Answer rating: 100% (QA)

The 20000000 spent on RD is a sunk cost as this amount is already spent and cannot be recovered by S... View the full answer