Your company, PacificCom, manufactures telecommunication

equipment and communication software. You have just received a copy of a consultants report that strongly recommends that investment proposals be accepted only if their internal rate of return (IRR) is higher than 12 percent. The rate 12 percent is presented as the weighted average cost of capital of PacificCom and was computed as follows:

where, RD =8% is the rate at which PacificCom can borrow from its banks; Tc=40% is the firms marginal corporate tax rate; [D/(D+E)]=30% and [(E/(D+E)]=70% are PacificCom financing ratios where D and E are the amount of debt and equity taken from the firms most recent balance sheet; and RE=15.1% is PacificComs cost of equity. It was calculated using the capital asset pricing model (CAPAM) with a risk-free rate (Rf) equal to the government bond rate of 6.5%, a market risk premium of 7%, and the equity beta coefficient of 1.23 (RE=6.5%+1.23*7%=15.1%).

You are the person in charge of the financial analysis of the equipment divisions investment proposals.

Do you agree with the consultants recommendation?