The Acrosstown Company has an equity beta, (L, of .5 and 50% debt in its capital structure.

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The Acrosstown Company has an equity beta, (L, of .5 and 50% debt in its capital structure. The company has risk-free debt that costs 6% before taxes, and the expected rate of return on the market is 18%. Acrosstown is considering the acquisition of a new project in the peanut raising agribusiness that is expected to yield 25% on after-tax operating cash flows. The Carter-nut Company, which is the same product line (and risk class) as the project being considered, has an equity beta, of 2.0 and has 10% debt in its capital structure. If Acrosstown finances the new project with 50% debt, should it be accepted or rejected? Assume that the marginal tax rate, (c, for both companies is 50%?
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Financial Theory and Corporate Policy

ISBN: 978-0321127211

4th edition

Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri

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