Question
4) John's Johnboats, a small boat manufacturer, is considering starting a new division that will produce jet skis. While the small boat industry has a
4) John's Johnboats, a small boat manufacturer, is considering starting a new division that will produce jet skis. While the small boat industry has a fairly low beta of 0.85, the jet-ski market has an average industry beta of 1.2. The firm's capital structure currently consists of one million outstanding shares of common stock, selling for $24 per share, and a five million dollar bond issue, selling at 107 percent of par. The expected market risk premium is 8 percent, and the current risk-free rate is 3.3%. The bonds pay a 10 percent annual coupon and mature in 20 years. If the new project will be funded with 50% percent equity and 50% debt and the firm faces a marginal tax rate of 34%, what should be the WACC for this new project? - a. 8.09% / b. 9.49% / c. 12.9%
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