Ernst Fin is the CFO at Quarantine Dynamics Group (QDG). He is evaluating the financial feasibility of a new project, Aerospace D. Ernst is focusing in determining the discount rate that should apply to the projects operating cash flows. The Aerospace D project will be the new member of QDG, joining Energy D and Biotech Comet (BTC).

Enrsts research staff sends him the following information what could be useful for determining WACC:

1. Financing will be a mix of debt/ common stock

2. Expected book value of debt $ 5,000,000

3. Expected value of debt once it hits the market: $ 7,000,000

4. The bond coupon rate is 8%. The market yield of the bond will be 10%.

5. Book value of common stock to be issued $ 5,000,000

6. The investment market thinks the equity market will trade the stock at a premium of 50% over book value.

7. Your staff could not generate the Beta of the project.

8. The Beta of holding company is 2.20

9. The Beta of the Energy division is 0.98. This division has Total Assets of $ 25 million.

10. The Beta of the Biotech division is 1.25. Bio Tech has Total Assets of $ 15 million

11. You have the following returns on Government Securities:

T-Bill: 1.25%

T-Note: 3.50%

T-Bond: 6.00%

12. The SP500 Expected return is $ 12%

13. The SP500 lasts year return was 8%

14. The tax planning department provides you with the rates per level of income. He is expected that the last dollar of taxable income of BTC will make it to level 4 in the table below.

Required:

1. What is the WACC of the Aerospace D project? Justify your model inputs.

2. If the IRR of the project is 15%, should you accept or reject the project?

3. What factors will make this project hurdle rate higher or lower than the computed WACC? Explain.