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Question 5 (20 marks) OmiDel Inc., a newly established pharmaceutical company focusing on manufacturing covid-19 vaccines. The firm's current capital structure is made up only
Question 5 (20 marks) OmiDel Inc., a newly established pharmaceutical company focusing on manufacturing covid-19 vaccines. The firm's current capital structure is made up only of common stock (60%) and long-term debt (40%). The firm's financing cost for its debt (before-tax) is 5% and its corporate income tax rate is 20%. Market data relevant to OmiDel's common stock (using CAPM) are as follows: Beta (common stock) = 1.5, rf= 2% and market-risk premium (RPM) = 8% = (a) Compute the WACC of OmiDel Inc. (3 marks) (b) Briefly explain what would happen to the following variables (metrics) if WACC is used as the required return for a (new) project whose risk is lower than the average (risk) of the firm's existing projects. i) The project's NPV (1.5 marks) ii) The chance of accepting / rejecting the project (1.5 marks)
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