17.8 Baber Corporation’s stock returns have a covariance with the market of 0.031. The standard deviation of the market returns is 0.16, and the historical market premium is 8.5 percent.

Baber bonds carry a 13-percent coupon rate and are priced to yield 11 percent. The market value of the bonds is $24 million. Baber stock, of which 4 million shares are outstanding, sells for $15 per share. Baber’s CFO considers the firm’s current debt-equity ratio optimal.

The tax rate is 34 percent, and the Treasury bill rate is 7 percent.

Baber Corp. must decide whether to purchase additional capital equipment. The cost of the equipment is $27.5 million. The expected cash flows from the new equipment are

$9 million a year for five years. Purchasing the equipment will not change the risk level of Baber Corp. Should Baber purchase the equipment?