Case $20\mathrm{.}1$

Clearview Security Technologies

United States. Clearview has experienced little competitive pressure in its core market and the company's offerings are standardized, enabled by significant technological and financial barriers to entry.

the contract and it is expected that margins will be pushed down.

trade at $115.$ The initial bond offering raised $$15,500,000$ and sold at par. The firm's marginal tax rate is $30$ percent.

The cost of equity and debt

a$.$ Calculate Clearview's cost of equity using the constant growth model approach and the CAPM approach. Take the arithmetic average of the two results.

The weight of equity and debt

a$.$ Calculate the weights of equity and debt in Clearview's capital structure.

b$.$ Determine Clearview's WACC.

Determining the NPV

Determine the NPV of the project using the WACC calculated earlier as the discount rate.

b$.$ Rework the analysis in part a using a discount rate of $10\%.$ What is the revised NPV of the project?

The RIG Project Decision

$5.$

a$.$ How should you respond?

b$.$ What would be the justification for using a higher discount rate, as introduced in question $4b?$

c$.$ Describe a situation where using a lower discount rate than a firm's current WACC might be appropriate.

d$.$ In considering the project's value, should the CCA tax shields be valued using the same discount rate as the firm's after$-$tax net revenues?