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Appropriate discount rate

11. The NuPress Valet Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is:
8.65%
9%
9.47%
10.5%
13%

Solution Preview

Appropriate discount rate=
=13%*.5+ 9%*(1-.34)*.5
=0.0947
=9.47%=Answer

Note:
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Solution Summary

This provides the steps to calculate the appropriate discount rate

$2.19