Question
The United Co. currently has a market value capital structure of 30% debt to total assets. The company believes that all new projects should be
The United Co. currently has a market value capital structure of 30% debt to total assets. The company believes that all new projects should be funded at the same debt to equity ratio so that the firm's ability to borrow at 4% (also assumed to be risk free rate) is maintained.
rF = 4%, rM = 11%, tax rate = 22%
The current beta of the firm's equity is 1.5.
The company is considering a project with the same systematic risk as the existing assets of the firm. The cost is 110 million dollars and the expected operating income is 13 million dollars (into perpetuity); should the company accept the project? (PLEASE SHOW WORK)
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