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Weighted average cost of capital

Please help with the WACC problems:

The Bigelow Company has a cost of equity of 12 percent, a pre-tax cost of debt of 7 percent, and a tax rate of 35 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is .60?

2. Carter & Carter (C&C) is considering a project that requires an initial cash outlay for equipment of $6.3 million. The equipment will be depreciated to a zero book value over the 4-year life of the project. At the end of the project, C&C expects to sell the equipment for $1 million. The project will produce cash inflows of $1.5 million a year for the first 2 years and $2.2 million a year for the following 2 years. C&C has a cost of equity of 12 percent and a pre-tax cost of debt of 8 percent. The debt-equity ratio is .75 and the tax rate is 35 percent. The company has decided that they will accept the project if the project's internal rate of return (IRR) exceeds the firm's weighted average cost of capital (WACC) by 2 percent or more. Should C&C accept this project and why or why not?

Solution Summary

Excel file contains calculations of weighted average cost of capital and Internal rate of return.

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