Question
Build er's Warehouse, Inc has an adjusted WACC of 9.70%. The company has a capital structure consisting of 50% equity and 50% debt, a cost
Build er's Warehouse, Inc has an adjusted WACC of 9.70%. The company has a capital structure consisting of 50% equity and 50% debt, a cost of equity of 13.00%, a before-tax cost of debt of 8.00%, and a tax rate of 20%. Builder's Warehouse is considering expanding by building a new outlet in a distant city and considers the project to be riskier than current operations. The firm estimates the existing beta to be 1.0, the required return on the market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.25. Given this information, and assuming the cost of debt will not change if the firm undertakes the new project, what adjusted WACC should be used in the decision-making?
A)10.45%
B)12.60%
C)13.32%
D)9.70%
Answer:
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