Question
The Becky Antique Car Company has an equity beta, b, of 0.8 and 40% debt in its capital structure.The company has risk-free debt that costs
The Becky Antique Car Company has an equity beta, b, of 0.8 and 40% debt in its capital structure.The company has risk-free debt that costs 3% before taxes, and the expected rate of return on the market is 10%.Becky is considering the acquisition of a new project in the micro car manufacturing business that is expected to yield 20% on after-tax operating cash flows.Linda's Mini's, which is in the same product line (and risk class) as the project being considered, has an equity beta, b, of 1.3 and has 20% debt in its capital structure.Becky will finance the new project with 30% long-term debt and marginal tax rates are 21% on everything.Find the WACC for the new project and decide what Becky should do.
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