1. World-Wide Enterprises (WWE) is a large conglomerate thinking of entering the widget business, where it plans...
Question:
1. World-Wide Enterprises (WWE) is a large conglomerate thinking of entering the widget business, where it plans to finance projects with a debt-to-value ratio of 25 percent (or, alternatively, a debt-to-equity ratio of 1/3). There is currently one firm in the widget industry, American Widgets (AW). This firm is financed with 40-percent debt and 60-percent equity. The beta of AW’s equity is 1.5. AW has a borrowing rate of 12 percent, and WWE expects to borrow for its widget venture at 10 percent. The corporate tax rate for both firms is 0.40, the market-risk premium is 8.5 percent, and the riskless interest rate is 8 percent. What is the appropriate discount rate for WWE to use for its widget venture?
Step by Step Answer:
Corporate Finance
ISBN: 9780071229036
6th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe