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D) XYZ Is a firm with 2 lines of business: chain restaurants and department stores. The firm is considering opening a new restaurant and
D) XYZ Is a firm with 2 lines of business: chain restaurants and department stores. The firm is considering opening a new restaurant and has asked you to obtain the WACC needed to evaluate the investment opportunity. You have the following information: XYZ's cost of equity is 15%. The capital structure of XYZ is 70% equity and 30% debt (they don't have preferred stocks) 1 year ago, the firm issued 10-year, 5% bonds. The bonds are selling for 95% of their face value of 1000. The tax rate is 25%. The expected return of the market is 10%. The risk-free rate is 4%. Chipotle is a pure-play firm in the chain restaurant business. Their capital structure is 50 equity and 50 debt, and their cost of equity is 11%. 1- Obtain the appropriate WACC for evaluating the restaurant investment opportunity. (10 points) 2- If the investment costs $10 million and generates project cashflows of $1 million indefinitely, would you say this is a profitable investment? (10 points)
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