JW Technologies, Inc. (JWT) is a 5-year-old public company founded to develop new battery technology for various electronic devices. The company plans to license the technology and does not plan to invest in manufacturing facilities. The company has previously issued common shares and one bond issue to fund its activities. The bonds have a remaining term of 20-years, a 10% semiannual coupon with a face (par) value of $1,000. The bond may be called in 5 years at a call price of $1,050 and currently sells for $1,100. The stock currently sells for $50/share. The expected market return is 15% and the risk-free rate is 3%. The JWT stocks beta is 1.2. The company is considering a project to build a prototype machine using existing funds. The machine costs $90,000 and has delivery and installation costs of $10,000. The company will fully use a building which it currently subleases for $20,000. The companys lease obligation ends at the end of the project period. Having the machine will increase royalties received by $120,000 per year for five years. Incremental expenses for the sales are $25,000 plus depreciation. The machine will be depreciated over five years and has a useful life of five years. The tax rate for JWT is 34%. The current market value of debt is $1,000,000 and the current market value of equity is $1,400,000. The ratio is similar to the long-term targeted mix of capital.

What is the required rate of return on the JWT equity based on the Capital Asset Pricing Model (CAPM)?

What is the current Weighted Average Cost of Capital (WACC)? What happens to the WACC if $600,000 in debt is added to the capital structure?

The beta of a security equals the covariance of the security with the market divided by the variance of the market.

What does beta measure?