Following is the book-value balance sheet for University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1 million common shares outstanding. Preferred stock pays a dividend of $2 per share, the beta of the common stock is .8, the market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 40%. University Products is evaluating a new venture into home computer systems. The internal rate of return on the new venture is estimated at 13.4%. WACCs of firms in the personal computer industry tend to average around 14%. Should the new project be pursued? Will University Products make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC?

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BOOK VALUE BALANCE SHEET all values in millions) Assets Liabilities and Net Worth Cash and short-term 1.00 | Bonds, coupon-8%, paid annually (maturity- 10 years, current yield to maturity : 990) S 10.00 Accounts receivable 3.00 Preferred stock (par vałue S20 per 2.00 0.10 share) Inventories Plant and equipment 7.00Common stock (par value S.10) 21.00Additional paid-in stockholders equty Retained earnings 9.90 10.00 S 32.00 Total S 32.00 Total Preferred stock current price Common stock current price S 20.00 8% S1,000.00 Bond Bond par value 10.00 years Current yield to Preferred stock par valueS 20.00 Common stock par value S0.10 Common shares outstandin Preferred stock dividend S2.00 Common stock beta Market risk premium Risk-free rate Tax Rate IRR on new venture WACC (industry average 9% 1.00 million 0.80 10% 6% 40% 13.4% 14%