5. Cost of capital Percy's Products, a privately-held company, has two operating divisions : Steel, which accounts for 60% of firm value; and, Oil, which accounts for 40% of firm value. Percy's Products is financed with debt ($8 million) and equity ($ 4 million); the equity has a beta of 2.30. Percy's Products has gathered the following data on two competing firms, each of which is very similar to the corresponding division of Percy's: Equity Beta Debt / (Debt +Equity) United Steel Union Oil 1.50 .20 .80 Assume the debt of ALL companies is risk-free. Further, assume the risk-free rate of return is 4%, the expected return on the market portfolio is 10%, and the standard deviation of return on the market portfolio is 20%. Assume perfect markets. A. Calculate the weighted Average Cost of Capital (WACC) of Percy's Products. B. Percy's Products' Oil division is considering a project with the following expected cash flows: t = 27 talt=2 +120 +100 to +60 What is the Internal Rate of Return (IRR) of this project (to the nearest percent)? As judged by the IRR method, is this a good project or a bad project? 5. Cost of capital Percy's Products, a privately-held company, has two operating divisions : Steel, which accounts for 60% of firm value; and, Oil, which accounts for 40% of firm value. Percy's Products is financed with debt ($8 million) and equity ($ 4 million); the equity has a beta of 2.30. Percy's Products has gathered the following data on two competing firms, each of which is very similar to the corresponding division of Percy's: Equity Beta Debt / (Debt +Equity) United Steel Union Oil 1.50 .20 .80 Assume the debt of ALL companies is risk-free. Further, assume the risk-free rate of return is 4%, the expected return on the market portfolio is 10%, and the standard deviation of return on the market portfolio is 20%. Assume perfect markets. A. Calculate the weighted Average Cost of Capital (WACC) of Percy's Products. B. Percy's Products' Oil division is considering a project with the following expected cash flows: t = 27 talt=2 +120 +100 to +60 What is the Internal Rate of Return (IRR) of this project (to the nearest percent)? As judged by the IRR method, is this a good project or a bad project