16. Interstate Transport has a target capital structure of 50 percent debt and 50 percent common equity. The firm is considering a new independent project which has an IRR of 13 percent and which is not related to transportation. However, a pure play proxy firm has been identified that is exclusively engaged in the new line of business. The proxy firm has a beta of 1.38. Both firms have a marginal tax rate of 40 percent, and Interstates before-tax cost of debt is 12 percent. The risk-free rate is 10 percent, and the market risk premium is 5 %. The firm should

a. Reject the project; its IRR is less than the firms required rate of return on the project of 16.9 percent.

b. Accept the project; its IRR is greater than the firms required rate of return on the project of 12.05 percent.

c. Reject the project; its IRR is only 13 percent.

d. Accept the project; its IRR exceeds the risk-free rate and the before-tax cost of debt.

e. Be indifferent between accepting or rejecting; the firms required rate of return on the project equals its expected return.