Answered step by step
Verified Expert Solution
Question
1 Approved Answer
4 . Adjusting WACC when the project is financed with different debt ratios In Part 2 , we assume that Sangria's crusher project is financed
Adjusting WACC when the project is financed with different debt ratios
In Part we assume that Sangria's crusher project is financed in the same debtequity ratio as the company as a whole debt ratio What if that is not true? For example, what if Sangria's perpetual crusher project supports only debt, versus for Sangria overall?
Moving from to debt may change all the inputs to the WACC formula. Obviously the financing weights change. But the cost of equity RE is less, because financial risk is reduced. The cost of debt may be lower too, but here we assume it stays at when the debt ratio is
Recall from Question that Sangrias cost of equity at debt ratio is
Formula:
Return on asset: RA DV RD EV RE
Return on equity: RE RA RA RD DE
Question : What is appropriate discount rate for Sangria's crusher project if it supports only debt ratio?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started