Question
Mojo Jojo's Jellybeans (MJJ) is a candy rm with 20,000 shares outstanding currently trading at $65.10 per share. They also have 3,000 bonds selling in
Mojo Jojo's Jellybeans (MJJ) is a candy rm with 20,000 shares outstanding currently trading at $65.10 per share. They also have 3,000 bonds selling in the market for $94 each and yielding 7%. Bubble's Buttercup Blossoms (BBB) is a competitor in the same industry. BBB has an equity beta of 1.3 and a debt to equity ratio of 35%. BBB's debt also yields 7%. The risk free rate is 4%, the market risk premium is 6%, and the corporate tax rate is 40% for all rms. You can assume the cost of debt stays constant in the future. Assume that the creditors of both companies do not admit the possibility of the deafult risk realization.
(a) What is MoJo Jojo's weighted average cost of capital (WACC)? (b) If Mojo Jojo changed their debt to equity ratio to 55%, what would their new WACC be? (c) Mojo Jojo decided to go ahead with changing their debt to equity ratio to 55%, as described in part (b). They are then presented with the opportunity to invest in a new candy called Mad Monkeys. The project will cost $55,201 and provide returns of $9,770 (post-tax) for ten years. Should Mojo Jojo undertake the project?
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