Question
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .87. The companys cost of equity is 14.7 percent, and
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .87. The companys cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +4 percent.
a. What is the companys WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. What discount rate should the firm use for the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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