Buster's target debt-to-equity ratio is .6,its cost of equity is 11.8 percent,and its beta is 1.2.The aftertax cost of debt is 6.4 percent,the tax rate is 34 percent,and the risk-free rate is 3.2 percent.What discount rate should be assigned to a new project the firm is considering if the project's beta is estimated at .87?

Question

Quizplus · Accepted Answer

R_SFirm = .118 = .032 + 1.2(MRP)MRP = .0717R_SProject = .032 + .87 (.0717)= .0944,or 9.44%WACC_Project = 1/1.6(.0944)+ .6/1.6 (.064)= .0830,or 8.30%

Buster's Target Debt-To-Equity Ratio Is