Discount cash flows on the proposed venture at the firm's WACC
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16. Capital Structure. Examine the following book-value balance sheet for University Products, Inc. What is the capital structure of the firm on the basis of market values? The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1 million common shares outstanding.
17. Calculating WACC. Turn back to University Products's balance sheet from the previous prob- lem. If the preferred stock pays a dividend of $2 per share, the beta of the common stock is .8, the market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 40%, what is University's weighted-average cost of capital? (LO3)
18. Project Discount Rate. University Products is evaluating a new venture into home computer systems (see Practice Problems 16 and 17). The internal rate of return on the new venture is estimated at 13.4%. WACCs of firms in the personal computer industry tend to average around 14%. Should the new project be pursued? Will University Products make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC?
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18. For evaluating the new venture into home computer, it is better to take the weighted average capital of the company. Internal rate of return of 13.4% cannot be taken for the evaluation purposes. Because, Internal rate of return ...
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