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# 12_Sol - Ch 12 Solutions(Concept 7 RSup =.12.75.08 =.1800...

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Ch. 12 Solutions (Concept) 7. R Sup = .12 + .75(.08) = .1800 or 18.00% Both should proceed. The appropriate discount rate does not depend on which company is investing; it depends on the risk of the project. Since Superior is in the business, it is closer to a pure play. Therefore, its cost of capital should be used. With an 18% cost of capital, the project has an NPV of \$1 million regardless of who takes it. 1. With the information given, we can find the cost of equity using the CAPM. The cost of equity is: R E = .045 + 1.30 (.13 – .045) = .1555 or 15.55% 2. The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = \$1,050 = \$40(PVIFA R%,24 ) + \$1,000(PVIF R%,24 ) R = 3.683% YTM = 2 × 3.683% = 7.37% And the aftertax cost of debt is: R D = .0737(1 – .30) = .05159 or 5.16% 12. a. We will begin by finding the market value of each type of financing. We find: MV D = 120,000(\$1,000)(0.93) = \$111,600,000 MV E = 9,000,000(\$34) = \$306,000,000 And the total market value of the firm is: V = \$111,600,000 + 306,000,000 = \$417,600,000 So, the market value weights of the company’s financing is: D/V = \$111,600,000/\$417,600,000 = .2672 E/V = \$306,000,000/\$417,600,000 = .7328 b. For projects equally as risky as the firm itself, the WACC should be used as the

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12_Sol - Ch 12 Solutions(Concept 7 RSup =.12.75.08 =.1800...

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