Suppose that Evita’s Subs, a local shipyard, is considering opening up a chain of sandwich shops.

Evita’s capital structure currently consists of 2 million outstanding shares of common stock, selling for \($83\) per share, and a \($50\) million bond issue, selling at 103 percent of par. Evita’s stock has a beta of 0.72, the expected market risk premium is 7 percent, and the current risk-free rate is 4.5 percent.

The bonds pay a 9 percent annual coupon and mature in 20 years. The current operations of the firm produce EBIT of \($100\) million per year, and the new sandwich operations would add only an expected

\($12\) million per year to that. Also, suppose that Evita’s management has done some research on the sandwich shop industry and discovered that such firms have an average beta of 1.23. If the new project will be funded for \($110\) million consisting of 50 percent debt and 50 percent equity, and Evita’s faces a marginal tax rate of 21 percent and can make full use of the tax shield on new debt, what should be the WACC for this new project?