Question
Company A Company B Market Value of Equity $250,000 $200,000 Market Value of Debt $600,000 $500,000 Cost of Equity 8% 10% Cost of Debt 2%
| Company A | Company B | |
| Market Value of Equity | $250,000 | $200,000 |
| Market Value of Debt | $600,000 | $500,000 |
| Cost of Equity | 8% | 10% |
| Cost of Debt | 2% | 2% |
| Tax Rate | 35% | 30% |
Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 5%?
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Neither Company A nor Company B
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Only Company B
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Both Company A and Company B
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Only Company A
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Multinational Business Finance
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
6th Edition
0201538997, 978-0201538991
