#11:

Part A: Exxon Corp wants to evaluate a new oil and gas investment. Currently, Exxon has a debt to equity ratio of 1:3. Exxons cost of equity is 16%, cost of debt is 6%, and tax rate is 30%. For the new project Exxon wants to finance the project with 50% debt and 50% equity (debt to equity ratio of 1). Assume the cost of debt will be the same under the new capital structure. What discount rate (WACC) should Exxon use to for this new project

Part B: Given Part A. The new investment will cost Exxon $10 M today and give cash flows of $5 M for 5 years, starting a year from today. Should Exxon invest in this project? (Yes or No)