Question
The Weston Enchilada Company has a levered equity beta of 0.8. The Company is thinking about getting into the Whataburger business. Currently, Weston Enchilada is
The Weston Enchilada Company has a levered equity beta of 0.8. The Company is thinking about getting into the Whataburger business. Currently, Weston Enchilada is financed with 50% long term debt. The debt is risk free and pays 4% interest before taxes. A little research suggests that the Whataburger business is expected to yield 16% on after tax total operating cash flows. For comparison, another whataburger in town has an equity beta of 2.5 but has 20% debt in its capital structure. You can assume that the market return is 12%, marginal tax rates on everything are 35%, and the new project would be financed with 50% debt. Find the WACC for the new whataburger venture and decide what Weston Enchilada should do?
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