Your company, Vulcan Enterprises Inc., is considering starting a division that drills to extremely deep depths, and uses the heat of Earths mantle to create geothermic energy. Vulcan Enterprises has spent $80,000,000 on R&D, and believes that the new geothermal plants it can produce will create electricity at half the cost of other technologies, is the safest alternative, and does not heat the atmosphere. The R&D cannot be sold because it is specific to Vulcan Enterprises. A large plant that Vulcan Enterprises owns would be used by the project. The plant could otherwise be sold today for $128,000,000 net of taxes. Your companys debt ratio will be 56%. The marginal corporate tax rate is 21%. There is a publicly traded company called DeepDrill Inc. that you believe is most comparable to your project. They have a debt ratio of 41%. The yield to maturity on their debt is 5.72%. With a debt ratio of 56%, you think that the yield to maturity on their debt would be 6.00%. They also have a marginal tax rate of 21%. Their stock beta is .8. The expected return on the market is 11.00% and the risk-free rate of interest is 4.00%. interest is 4.00%.

(4 points) An opportunity cost of the project is:

Select one:

a. There are no opportunity costs

b. The $80,000,000 expenditure on R&D.

c. The $128,000,000 plant. Correct

d. Both the 80,000,000 expenditure on R&D and the $128,000,000 plant.

Q 3

Question 3

(4 points) A sunk cost of the project is:

Select one:

a. There are no sunk costs

b. The $80,000,000 expenditure on R&D. correct

c. The $128,000,000 plant.

d. Both the 80,000,000 expenditure on R&D and the $128,000,000 plant.

Q 4

Question 4

(4 points) R_S (the required return on the stock) for DeepDrill is __________.

Answer:

Q 5

Question 5

(6 points) R₀ (the unlevered required return on the stock) for DeepDrill is __________.

Answer:

Q 6

Question 6

(6 points) R_S (the required return on the stock) for Vulcan Enterprises is __________.

Answer:

Q 7

Question 7

(6 points) The WACC for Vulcan Enterprises is __________.

Answer: