Question
ABC Co. is considering raising money to fund an expansion into Fizzy Pop in 2022. It feels it can make a return on invested capital
ABC Co. is considering raising money to fund an expansion into Fizzy Pop in 2022. It feels it can make a return on invested capital of 8% after all expenses on this expansion and anticipates at the time that it will have invested equity of $12,000 and outstanding long-term debt of $8,000 @ 10% interest. ABC Co. anticipates that the project is a bit riskier than it typically used to be and assumes that an equity investor will consider the project twice as risky as the typical market premium of 8% historically.
A. Estimate ABC Co.s Cost of Equity Capital using the CAPM equation for equity returns assuming a current risk-free rate of 2%.
B. Calculate ABC Co.s Weighted Average Cost of Capital assuming a tax rate of 20%.
C. Advise ABC Co. in 2-3 sentences on what WACC means and whether investing in a project with a return of 8% on invested capital makes sense given its WACC.
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