Decker's is an all-equity financed chain of retail furniture stores. Furniture Fashions produces furniture and is the primary supplier to Decker's. Decker's has a beta of 1.62 as compared to Furniture Fashions' beta of 1.43. The risk-free rate of return is 3.1 percent and the market risk premium is 7.6 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

Question

Quizplus · Accepted Answer

The correct answer is A because Decker's is an all-equity financed firm, so its WACC is equal to its cost of equity. The cost of equity can be calculated using the CAPM:Cost of equity = Risk-free rate + Beta * Market risk premiumCost of equity = 3.1% + 1.62 * 7.6% = 13.97%

Decker's Is an All-Equity Financed Chain of Retail Furniture Stores