3 02 111 08 986 the adjusted wacc of 986 can be

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Unformatted text preview: respectively. Assuming a 30% corporate tax rate the after-tax WACC of the firm is: o - - - r D E rD  rE V V 0.4 ˜ 7%  0.6 ˜ 12.5% 10.3% rE r  (r  rD ) D E 10.3%  (10.3%  7%) ˜ 0.25 11.1% WACC §D· §E· rD (1  Tc )¨ ¸  rE ¨ ¸ ©V ¹ ©V ¹ 7% ˜ (1  0.3) ˜ 0.2  11.1% ˜ 0.8 9.86% The adjusted WACC of 9.86% can be used as the discount rate for the new project as it reflects the underlying business risk and mix of financing. As the project requires an initial investment of $125 million and produced a constant cash flow of $11.83 per year for ever, the projects NPV is: o - 9.46% Step 3: Estimate the project's WACC o - 7% ˜ (1  0.3) ˜ 0.4  12.5% ˜ 0.6 Step 2: Estimate the expected rate of return on equity using the project's debt-equity ratio. As the debt ratio is equal to 20%, the debt-equity ratio equals 25%. o - §E· §D· rD (1  Tc )¨ ¸  rE ¨ ¸ ©V ¹ ©V ¹ The firm is considering investing in a new project with a perpetual stream of cash flows of $11.83 million per year pre-tax. T...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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