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A manager gathers the following data for a company with 40 percent debt and 60 percent equity in its capital structure: Required return on debt
A manager gathers the following data for a company with 40 percent debt and 60 percent equity in its capital structure:
Required return on debt | 7 percent |
Required return on firm's equity | 10 percent |
Risk-free rate of return | 4 percent |
Market equity risk premium | 6 percent |
Company beta | 1.15 |
Project X beta | 1.50 |
Project Y beta | 0.80 |
If the firm applies its overall weighted average cost of capital (WACC) to discount each new project's cash flows, the most likely effect on each project's NPV is that:
Question 18 options:
| Project X is overvalued and project Y is overvalued. |
| Project X is undervalued and project Y is overvalued. |
| Project X is overvalued and project Y is undervalued. |
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