Answered step by step
Verified Expert Solution
Link Copied!

Question

00
1 Approved Answer

U.S. Robotics (USR) has a current (and target) capital structure of 80 percent common equity and 20 percent debt. The beta for USR IS 1.

image text in transcribed
U.S. Robotics (USR) has a current (and target) capital structure of 80 percent common equity and 20 percent debt. The beta for USR IS 1. USR Is evaluating an Investment in a totally new line of business. The new investment has an expected internal rate of return of 21 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. USR's 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 1.3, and their average capital structure is 40 percent common equity and 60 percent debt. The marginal tax rate for these three firms averages 40 percent. The risk-free rate is 7 percent, and the expected market rlsk premium is 8 percent. Should USR undertake the project? Round your answer to one decimal place. The project should be accepted for any after-tax cost of debt of % or -Select

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Accounting questions