"We R Toys" (WRT) is considering expanding into new geographic markets. The expansion

will have the same business risk as WRT's existing assets. The expansion will require an initial

investment of $50 million and is expected to generate perpetual EBIT of $20 million per year.

After the initial investment, future capital expenditures are expected to equal depreciation, and

no further additions to net working capital are anticipated

WRT's existing capital structure is composed of $500 million in equity and $300 million in

debt (market values), with 10 million equity shares outstanding. The unlevered cost of capital

is 10%, and WRT's debt is risk free with an interest rate of 4%. The corporate tax rate is 35%,

and there are no personal taxes.

WRT initially proposes to fund the expansion by issuing equity. If investors were not expecting

this expansion, and if they share WRT's view of the expansion's profitability, what will

the share price be once the firm announces the expansion plan?

answer

20m*0.65/0.1-50m = 80m

why does this answer use unlevered cost not WACC?