For the purpose of this question, the current date is Dec 31st, 2014.DownScale, Inc is a diet marketing company which sells books, supplements, and diet foods.It has after-tax earnings in 2014 of $200M or $4.00 earnings per share (50m shares outstanding), and a tax rate of 30%. It also has $500M in debt on which it pays $25M in interest annually.Dividends of $1.30 per share were paid on December 30, 2014. Its stock price was $60 per share on December 31, 2014.DownScale'sequity beta is 1.2. The risk free rate is 3% and the risk premium on the market is 6%.

What isDownScale'sweighted average cost of capital (WACC)? Choose one

What is the discount rateDownScaleshould use to value a new line of books, in line with its current company risk profile? Pick one of the follwing:

The expected return on DownScale's stock (your answer from #12), since the company should finance the investment with a new stock offering given its low stock price

The risk-free rate, since the investment is small, and doesn't represent much risk to the company

The WACC (your answer from Question #16), since the new product is in line with its current risk profile

The non-WACC discount rate calculated by using the averaged un-levered betas of comparable book publishers in the CAPM formula, since the project doesn't represent the industry in which the company currently operates

The interest rate on its debt of 4.5%, since the company should finance the investment with a new debt offering given its low debt to equity ratio

The Market Risk Premium of 6%, since on average, this is the premium that risky investments earn above the risk-free rate

IfDownScaledesired to begin building gyms it should use a rate lower then the WACC calculated in Question #16 because this would be considered to be a safe project.

True

False