JP Manufacturing Company's current capital structure is comprised of 50% debt and 50% equity (based on market values). JP's equity beta (based on its current level of debt financing) is 1.7, and its debt beta is 0.3. Also, the risk-free rate of interest is currently 4.8% on long-term government bonds. Market risk premium is 5.2%.

a)What is the estimated cost of equity capital for JP (based on the CAPM)? If JP's marginal tax rate is 30%, what is the firm's overall weighted average cost of capital (WACC)?

3 Mark

b)JP is considering investing in a new technology. The firm's investment banker estimates that JP will be able to borrow up to 30% of the needed funds and maintain its current credit rating and borrowing cost. Estimate the WACC for this project.

4 Marks

c)Explain what are the consequences of using firm WACC in analysing this new technology investment.

3 marks