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Intro Your company is evaluating two projects and has collected the following information: Project A Project B Expected return (IRR) 12% 7% Same as existing
Intro Your company is evaluating two projects and has collected the following information: Project A Project B Expected return (IRR) 12% 7% Same as existing Same as existing Risk business business Suggested source of Equity Long-term debt financing After-tax cost of financing 13% 5% The company currently has a capital structure consisting of 30% equity and 70% long-term debt. Part 1 | Attempt 5/5 for 0 pts. Without doing any calculations, what should the company do and why? Reject both projects, since their expected returns are too low (incorrect) Accept only project B, since its cost of financing is less than project A's Look for a better reason to make a decision (missed) Accept only project A, since its expected return is greater than project B's Accept only project B, since its expected return is greater than its cost of financing Accept both projects, since they are not riskier than the existing business Incorrect The company should look for a better reason. A project should only be accepted if its expected return is greater than its required return. The required return is a function of the risk of the project, NOT its financing. Therefore, the use of funds (the risk of the project) rather than the source of funds (financing) matters for determining the required return. Since the projects are as risky as the company overall, we can use the company's WACC as each project's required return. Attempt 1/10 for 10 pts. Part 2 What is the firm's overall (after-tax) cost of capital? 3+ decimals Submit
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