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The following information is provided for company B. There is a new opportunity to invest in project A. Project manager believes the riskiness of this
The following information is provided for company B. There is a new opportunity to invest in project A. Project manager believes the riskiness of this project is similar to the average risk of the company.
| Book Asset | 100 |
| Book Liability | 60 |
| Book Equity | 40 |
| Market Asset | 100 |
| Market Liability | 20 |
| Market Equity | 80 |
| Debt beta | 0.3 |
| Equity beta | 1.4 |
| Corporate tax rate | 35% |
| YTM on corporate issued bonds | 5.50% |
| long-term risk-free rate | 2.60% |
| Market risk premium | 6% |
| Year | 0 | 1 | 2 | 3 | 4 |
| Project Cash flow | -80 | 20 | 30 | 50 | 20 |
- Calculate the company after-tax WACC based on estimating the asset beta.
- The project manager thinks the cash flows starting year 1 is overstated by 10%. Should you accept or reject the project?
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