a. | |||||
WACC | Weight of equity*Cost of equity + Weight of debt*Cost of debt | ||||
Calculation of weights is shown below | |||||
Weights | |||||
Equity | 1.00 | 0.53 | 1/1.89 | ||
Debt | 0.89 | 0.47 | 0.89/1.89 | ||
1.89 | |||||
Calculation of WACC is shown below | |||||
WACC | (0.53*0.149)+(0.47*0.082) | ||||
WACC | 11.74% | ||||
Thus, company's WACC is 11.74% | |||||
b. | |||||
Calculation of discount rate for project | |||||
Discount rate | WACC+Adjustment factor | ||||
Discount rate | 11.74%+3% | ||||
Discount rate | 14.74% | ||||
Thus, discount rate for project is 14.74% | |||||
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .89....
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