Example $10$: KK Breweries manufactures and sells ten different branded wines. The firm is listed on NYSE. The current stock price is $$37\mathrm{.}50$ with $2$ million shares outstanding. The equity beta is $1\mathrm{.}15.$ The firm also has $0\mathrm{.}1$ million, $15-$year zero coupon bonds whose interest is compounded semi$-$annually. The yield to maturity for the bonds is $5\mathrm{.}395\%.$ Due to long term uncertainty in supply of grapes $($from which wine is made$),$ KK is considering acquisition of Grapes R Us $($GRU$),$ a firm in agriculture sector which focuses on growing grapes. GRU is a private company $($not listed on the stock exchange$).$ The equity beta of agriculture sector $1\mathrm{.}246$ with average debt to equity ratio of $0\mathrm{.}30.$ KK will finance acquisition of GRU with debt$-$to$-$equity ratio of $1.$ New debt can be secured at $6\mathrm{.}5\%$ interest rate $($before tax$).$ The long$-$term risk$-$free rate is $4\%$ while the market risk premium is $8\%.$ The marginal corporate tax rate is $30\%.$

Required:

a$)$ What is the current WACC of KK Breweries?

b$)$ Why would you advise KK not to use its WACC to evaluate acquisition of GRU?

c$)$ What discounting rate should KK use to evaluate acquisition of GRU?

General Electric $($GE$),$ an industrial sector firm, has $1\mathrm{.}09$B common shares outstanding, each trading at $$139\mathrm{.}28.$ The firm also has $49$ million, $15-$year zero$-$coupon bonds each trading at $59\mathrm{.}425.$ Interest is compounded semi$-$annually. The firm$$s beta is $1\mathrm{.}20.$