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Grass & Weeds Gardening Co. has a target debt/equity ratio of 2.75. Its existing bonds have a yield to maturity of 8%. Its outstanding stock
Grass & Weeds Gardening Co. has a target debt/equity ratio of 2.75. Its existing bonds have a yield to maturity of 8%. Its outstanding stock has a beta of 0.75. The risk-free rate is 3% and the market risk premium is 7.5%. The tax rate is 40%. If the firm will finance its next project with 20% new equity and 80% new debt, what is the appropriate discount rate to use when analyzing the projects NPV?
Select one:
a. 5.82%
b. 7.23%
c. 7.5%
d. 7.86%
e. None of the above
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