Question
U.S. Robotics (USR) has a current (and target) capital structure of 65 percent common equity and 35 percent debt. The beta for USR is 1.4.
U.S. Robotics (USR) has a current (and target) capital structure of 65 percent common equity and 35 percent debt. The beta for USR is 1.4. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate of return of 19 percent. USR wishes to evaluate this investment proposal. If the investment is made, USR intends to finance the project with the same capital structure as its current business. USRs marginal tax rate is 30 percent. USR has identified three firms that are primarily in the line of business into which USR proposes expanding. Their average beta is 1.7, and their average capital structure is 35 percent common equity and 65 percent debt. The marginal tax rate for these three firms averages 40 percent. The risk-free rate is 6 percent, and the expected market risk premium is 8 percent. Should USR undertake the project? Round your answer to one decimal place.
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