Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com- pany is now evaluating a new venture into home computer systems. The internal rate of return on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend to average around 14%. (LO13-2) a. What is Universal's WACC? b. Will Universal make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC? c. Should the new project be pursued?

Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com- pany is now evaluating a new venture into home computer systems. The internal rate of return on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend to average around 14%. (LO13-2) a. What is Universal's WACC? b. Will Universal make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC? c. Should the new project be pursued?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 21P

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