Professional Documents
Culture Documents
11-2
Chapter 11, Solutions Cornett, Adair, and Nofsinger
LG$ 11-2 9aiLai Cos3 stock has a "eta of 131, the current risk-free rate is /32 percent, and the
e#pected return on the market is 12 percent3 hat is 9aiLai!s cost of e+uity?
Solution: 5sing e/uation ))6:
( )
[ ] 32/2 131 312 32/2
312-1
" f " , f
i i " i i 1 +
]
+
LG$ 11-$ :"eron 4nc3 has a ;22 million <face .alue= "ond issue selling for 60 percent of par
that pays an annual coupon of 132- percent3 hat would "e :"eron!s "efore-ta#
component cost of de"t?
Solution: Solving e/uation ))7 for i
$
:
( )
( )
12
12
1
1
1 ;1, 222
Sol.e ;602 ;123-2 for
1
$
$
$
$
i
i
i
i
1
1
+
1
+
' ;
1
+
1
]
+ields i
$
8 .9:;))7, or :.;))7<
LG$ 11-' >aty8id Clothes has a ;1-2 million <face .alue= "ond issue selling for 12' percent
of par that carries a coupon rate of 11 percent, paid semiannually3 hat would "e
>atydid!s "efore-ta# component cost of de"t?
Solution: Solving e/uation ))7 for i
$
:
( )
( )
'2
'2
1
1
1 ;1, 222
Sol.e ;1,2'2 ;-- for
1
$
$
$
$
i
i
i
i
1
1
+
1
+
' ;
1
+
1
]
+ields i
$
8 .9767:=, or 7.67:=< on a semiannual basis. Since the cost of debt is
normally /uoted on a nominal annual basis, we should multiple this semiannual rate
by two to get a /uoted component cost of 7.67:=< ' 6 8 )9.7);6<
LG$ 11-- 4L> has preferred stock selling for 60 percent of par that pays an 1 percent annual
coupon3 hat would "e 4L>!s component cost of preferred stock?
Solution: 5sing e/uation ))>:
11-$
Chapter 11, Solutions Cornett, Adair, and Nofsinger
1
2
;1
;60
3212-, or 132-?
#
$
i
#
LG$ 11-/ *arme 4nc3 has preferred stock selling for 1$0 percent of par that pays an 11 percent
annual coupon3 hat would "e *arme!s component cost of preferred stock?
Solution: 5sing e/uation ))>:
1
2
;11
;1$0
3212$, or 132$?
#
$
i
#
LG' 11-0 @arCry 4ndustries, a maker of telecommunications e+uipment, has 2 million shares
of common stock outstanding, 1 million shares of preferred stock outstanding, and
12 thousand "onds3 4f the common shares are selling for ;20 per share, the preferred
share are selling for ;1'3-2 per share, and the "onds are selling for 61 percent of par,
what would "e the weight used for e+uity in the computation of @arCry!s &CC?
Solution: 5sing the computation for e/uity weight given in e/uation ))):
2, 222, 222 ;20
2, 222, 222 ;20 1, 222, 222 ;1'3-2 12, 222 361 ;1, 222
;-', 222, 222
;01, $22, 222
3/160, or /1360?
"
" # $
+ + + +
LG' 11-1 :*G 4nc3 has ' million shares of common stock outstanding, $ million shares of
preferred stock outstanding, and - thousand "onds3 4f the common shares are selling
for ;10 per share, the preferred share are selling for ;2/ per share, and the "onds are
selling for 121 percent of par, what would "e the weight used for e+uity in the
computation of :*G!s &CC?
Solution: 5sing the computation for e/uity weight given in e/uation ))):
11-'
Chapter 11, Solutions Cornett, Adair, and Nofsinger
', 222, 222 ;10
', 222, 222 ;10 $, 222, 222 ;2/ -, 222 1321 ;1, 222
;/1, 222, 222
;1-1, '22, 222
3''61, or ''361?
"
" # $
+ + + +
LG' 11-6 @arCry 4ndustries, a maker of telecommunications e+uipment, has 2 million shares
of common stock outstanding, 1 million shares of preferred stock outstanding, and
12 thousand "onds3 4f the common shares are selling for ;20 per share, the preferred
share are selling for ;1'3-2 per share, and the "onds are selling for 61 percent of par,
what weight should you use for de"t in the computation of @arCry!s &CC?
Solution: 5sing the computation for e/uity weight given in e/uation ))):
2, 222, 222 ;20
2, 222, 222 ;20 1, 222, 222 ;1'3-2 12, 222 361 ;1, 222
;6,122, 222
;01, $22, 222
312-2, or 123-2?
"
" # $
+ + + +
LG' 11-12 :*G 4nc3 has ' million shares of common stock outstanding, $ million shares of
preferred stock outstanding, and - thousand "onds3 4f the common shares are selling
for ;10 per share, the preferred share are selling for ;2/ per share, and the "onds are
selling for 121 percent of par, what weight should you use for de"t in the
computation of :*G!s &CC?
Solution: 5sing the computation for e/uity weight given in e/uation ))):
-, 222 1321 ;1, 222
', 222, 222 ;10 $, 222, 222 ;2/ -, 222 1321 ;1, 222
;-, '22, 222
;1-1, '22, 222
32$-0, or $3-0?
"
" # $
+ + + +
LG' 11-11 @arCry 4ndustries, a maker of telecommunications e+uipment, has 2 million shares
of common stock outstanding, 1 million shares of preferred stock outstanding, and
12 thousand "onds3 4f the common shares sell for ;20 per share, the preferred shares
sell for ;1'3-2 per share, and the "onds sell for 61 percent of par, what weight
should you use for preferred stock in the computation of @arCry!s &CC?
Solution: 5sing the computation for e/uity weight given in e/uation ))):
11--
Chapter 11, Solutions Cornett, Adair, and Nofsinger
2, 222, 222 ;20
2, 222, 222 ;20 1, 222, 222 ;1'3-2 12, 222 361 ;1, 222
;1', -22, 222
;01, $22, 222
311-2, or 113-2?
"
" # $
+ + + +
LG' 11-12 :*G 4nc3 has ' million shares of common stock outstanding, $ million shares of
preferred stock outstanding, and - thousand "onds3 4f the common shares sell for
;10 per share, the preferred share sell for ;2/ per share, and the "onds sell for 121
percent of par, what weight should you use for preferred stock in the computation of
:*G!s &CC?
Solution: 5sing the computation for e/uity weight given in e/uation ))):
$, 222, 222 ;2/
', 222, 222 ;10 $, 222, 222 ;2/ -, 222 1321 ;1, 222
;01, 222, 222
;1-1, '22, 222
3-1-2, or -13-2?
"
" # $
+ + + +
4ntermediate )ro"lems
LG2 11-1$ Suppose that ,ap8ance, 4nc3!s capital structure features /- percent e+uity, $-
percent de"t, and that its "efore-ta# cost of de"t is 1 percent, while its cost of e+uity
is 1$ percent3 4f the appropriate weighted a.erage ta# rate is $' percent, what will
"e ,ap8ance!s &CC?
Solution: 5sing e/uation ))):
( )
( )
&CC 1
3/- 1$? 2 2? 3$- 1? 1 3$'
123261?
" # $ C
" # $
i i i %
" # $ " # $ " # $
+ +
+ + + + + +
+ +
LG2 11-1' 9L) 4ndustries has /3- million shares of common stock outstanding with a market
price of ;1'322 per share3 ,he company also has outstanding preferred stock with a
market .alue of ;12 million, and 2-,222 "onds outstanding, each with face .alue
;1,222 and selling at 62? of par .alue3 ,he cost of e+uity is 1'?, the cost of
preferred is 12?, and the cost of de"t is 032-?3 4f 9L)As ta# rate is $'?, what is the
&CC?
Solution: 5sing e/uation ))):
11-/
Chapter 11, Solutions Cornett, Adair, and Nofsinger
( ) &CC 1
/, -22, 222 ;1'
1'?
/, -22, 222 ;1' ;12, 222, 222 2-, 222 ;1, 222 36
;12, 222, 222
12?
/, -22, 222 ;1' ;12, 222, 222 2-, 222 ;1, 222 36
2-, 222 ;1, 222 36
/, -22, 222 ;1' ;12, 222, 222 2-,
" # $ C
" # $
i i i %
" # $ " # $ " # $
+ +
+ + + + + +
+ +
+
+ +
+
+ +
( )
( )
032-? 1 3$'
222 ;1, 222 36
;61, 222, 222
1'?
;61, 222, 222 ;12, 222, 222 22, -22, 222
;12, 222, 222
12?
;61, 222, 222 ;12, 222, 222 22, -22, 222
22, -22, 222
032-? 1 3$'
;61, 222, 222 ;12, 222, 222 22, -22, 222
330$/1 1'? 32112
+ +
+
+ +
+
+ +
+ ( ) 12? 31122 032-? 1 3$'
113660$?
+
LG2 11-1- Suppose that 97 Cos3 has a capital structure of 01 percent e+uity, 22 percent de"t,
and that its "efore-ta# cost of de"t is 11 percent while its cost of e+uity is 10 percent3
4f the appropriate weighted a.erage ta# rate is 2- percent, what will "e 97!s &CC?
Solution: 5sing e/uation ))):
( )
( )
&CC 1
301 10? 2 2? 322 11? 1 32-
1-320-?
" # $ C
" # $
i i i %
" # $ " # $ " # $
+ +
+ + + + + +
+ +
LG2 11-1/ Suppose that 727, 4nc3 has a capital structure of $0 percent e+uity, 10 percent
preferred stock, and '/ percent de"t3 4f the "efore-ta# component costs of e+uity,
preferred stock and de"t are 1'3- percent, 11 percent and 63- percent, respecti.ely,
what is 727!s &CC if the firm faces an a.erage ta# rate of $2??
Solution: 5sing e/uation ))):
11-0
Chapter 11, Solutions Cornett, Adair, and Nofsinger
( )
( )
&CC 1
3$0 1'3-? 310 11? 3'/ 63-? 1 3$2
631-6?
" # $ C
" # $
i i i %
" # $ " # $ " # $
+ +
+ + + + + +
+ +
LG2 11-10 Suppose that *B4B> 4ndustries! capital structure features /$ percent e+uity, 0
percent preferred stock, and $2 percent de"t3 4f the "efore-ta# component costs of
e+uity, preferred stock and de"t are 113/2 percent, 63- percent and 0 percent,
respecti.ely, what is *B4B>!s &CC if the firm faces an a.erage ta# rate of $'??
Solution: 5sing e/uation ))):
( )
( )
&CC 1
3/$ 113/2? 320 63-? 3$2 0? 1 3$'
63$-6?
" # $ C
" # $
i i i %
" # $ " # $ " # $
+ +
+ + + + + +
+ +
LG$ 11-11 ,&@>&) 4ndustries has $ million shares of stock outstanding selling at ;10 per
share and an issue of ;22 million in 03- percent, annual coupon "onds with a
maturity of 1- years, selling at 12/ percent of par3 4f ,&@>&)!s weighted a.erage
ta# rate is $' percent and its cost of e+uity is 1'3- percent, what is ,&@>&)!s
&CC?
Solution: ?irst, solve e/uation ))7 for i
$
:
( )
( )
( )
( )
1-
1-
1
1
1
Sol.e )C )*, for
1
1
1
1
;1, 222
Sol.e ;1,2/2 ;0- for
1
/31'0/?
N
$
$
N
$
$
$
$
$
$
$
i
#@
i
i
i
i
i
i
i
i
1
1
+
1
+
' ;
1
+
1
1
]
1
1
+
1
+
' ;
1
+
1
1
]
+
+
+
LG$ 11-16 9ohnny Cake Ltd3 has 12 million shares of stock outstanding selling at ;2$ per share
and an issue of ;-2 million in 6 percent, annual coupon "onds with a maturity of 10
years, selling at 6$3- percent of par3 4f 9ohnny Cake!s weighted a.erage ta# rate is
$' percent, its ne#t di.idend is e#pected to "e ;$322 per share, and all future
di.idends are e#pected to grow at / percent per year, indefinitely, what is its
&CC?
Solution: ?irst, solve e/uation ))7 for i
$
:
( )
( )
( )
( )
10
10
1
1
1
Sol.e )C )*, for
1
1
1
1
;1, 222
Sol.e ;6$- ;62 for
1
63122$?
N
$
$
N
$
$
$
$
$
$
$
i
#@
i
i
i
i
i
i
i
i
1
1
+
1
+
' ;
1
+
1
1
]
1
1
+
1
+
' ;
1
+
1
1
]
+
+
+
LG' 11-22 7etter)ie 4ndustries has $ million shares of common stock outstanding, 2 million
shares of preferred stock outstanding, and 12 thousand "onds3 4f the common shares
are selling for ;'0 per share, the preferred shares are selling for ;2'3-2 per share,
and the "onds are selling for 66 percent of par, what would "e the weights used in
the calculation of 7etter)ie!s &CC?
Solution: 5sing the computations for component weights given in e/uation ))):
$, 222, 222 ;'0
$, 222, 222 ;'0 2, 222, 222 ;2'3-2 12, 222 366 ;1, 222
;1'1, 222, 222
;166, 622, 222
302-', or 023-'?
2, 222, 222 ;2'3-2
$, 222, 222 ;'0 2, 222, 222 ;2'3-2 12, 222 366 ;1, 222
;'6, 222, 222
;166, 62
"
" # $
#
" # $
+ + + +
+ + + +
2, 222
32'-1, or 2'3-1?
12, 222 366 ;1, 222
$, 222, 222 ;'0 2, 222, 222 ;2'3-2 12, 222 366 ;1, 222
;6, 622, 222
;166, 622, 222
32'6-, or '36-?
$
" # $
+ + + +
LG1 11-21 Suppose that 7rown-*urphies! common shares sell for ;163-2 per share, are
e#pected to set their ne#t annual di.idend at ;3-0 per share, and that all future
di.idends are e#pected to grow "y ' percent per year, indefinitely3 4f 7rown-
*urphies faces a flotation cost of 1$? on new e+uity issues, what will "e the
flotation-ad5usted cost of e+uity?
Solution: 5sing e/uation ))::
11-12
Chapter 11, Solutions Cornett, Adair, and Nofsinger
( )
1
2
;3-0
32'
;163-2 31$ ;163-2
320$/, or 03$/?
"
$
i g
# ?
+
&d.anced )ro"lems
LG2 11-22 & firm is considering a pro5ect that will generate perpetual after-ta# cash flows of
;1-,222 per year "eginning ne#t year3 ,he pro5ect has the same risk as the firmAs
o.erall operations and must "e financed e#ternally3 %+uity flotation costs 1'? and
de"t issues cost '? on an after-ta# "asis3 ,he firmAs 8D% ratio is 2313 hat is the
most the firm can pay for the pro5ect and still earn its re+uired return?
Solution: 1f the $2" ratio is 9.:, then $2($B"* will be 9.:2).: 8 .>>>> and "2($B"* will be
).92).: 8 .777=.
%hen, using e/uation ))), solve for &ACC:
( ) &CC 1
3---/ 1'? 3'''' '?
63---/?
" $ C
" $
i i %
" # $ " # $
+
+ + + +
+
LG2 11-2$ & firm has -,222,222 shares of common stock outstanding, each with a market price
of ;1322 per share3 4t has 2-,222 "onds outstanding, each selling for ;1223 ,he
"onds mature in 12 years, ha.e a coupon rate of 1?, and pay coupons semi-
annually3 ,he firm!s e+uity has a "eta of 13', and the e#pected market return is
1-?3 ,he ta# rate is $-? and the &CC is 1-?3 Calculate the risk free rate3
Solution: ?irst, solve e/uation ))7 for i
$
:
11-11
Chapter 11, Solutions Cornett, Adair, and Nofsinger
( )
( )
( )
( )
22
22
1
1
1
Sol.e )C )*, for
1
1
1
1
;1, 222
Sol.e ;122 ;'2 for
1
-30210? 2 113'2$'?
N
$
$
N
$
$
$
$
$
$
$
i
#@
i
i
i
i
i
i
i
i
1
1
+
1
+
' ;
1
+
1
1
]
1
1
+
1
+
' ;
1
+
1
1
]
%hen solve e/uation ))) for i
"
:
( )
( )
( )
&CC 1
-, 222, 222 ;1322 2-, 222 ;122
1-? 113'2$'? 1 3$-
-, 222, 222 ;1322 2 2-, 222 ;122 -, 222, 222 ;1322 2 2-, 222 ;122
1-? 3///0 3$$$$ 113'2$'? 1 3$-
1-? 3///0 23'020?
123-26$? 3///0
" $ C
"
"
"
" $
i i %
" # $ " # $
i
i
i
+
+ + + +
+
+ + + +
+
+
123-26$?
3///0
11306$6?
"
"
"
i
i
i
?inally, putting this into e/uation ))= and solving for the riskfree rate:
( )
11306$6? 13' 1-?
11306$6? 21? 13'
3' 21? 11306$6?
3' 2322/1?
2322/1?
3'
-3-1-$?
" f Avg , f
f f
f f
f
f
f
f
i r " r r
r r
r r
r
r
r
r
1 +
]
1 +
]
+
11-12
Chapter 11, Solutions Cornett, Adair, and Nofsinger
LG/ 11-2' &n all-e+uity firm is considering the pro5ects shown "elow3 ,he ,-"ill rate is '
percent and the market risk premium is 0 percent3 4f the firm uses its current &CC
of 12 percent to e.aluate these pro5ects, which pro5ect<s=, if any, will "e incorrectly
re5ected?
Projet E!"ete# Return $et%
& 132? 23-
7 1632? 132
C 1$32? 13'
8 1032? 13/
Solution: 5sing the firm-s &ACC of )6 percent as the 133 benchmark, pro.ect A would be
re.ected. 5sing e/uation ))6, the pro.ectspecific benchmarks for each pro.ect
should be:
( )
[ ]
( )
[ ]
( )
[ ]
( )
[ ]
@or )ro5ect &E
'? 23- 0?
03-?
@or )ro5ect 7E
'? 132 0?
123'?
@or )ro5ect CE
'? 13' 0?
1$31?
@or )ro5ect 8E
'? 13/ 0?
1-32?
" f " , f
" f " , f
" f " , f
" f " , f
i i " i i
i i " i i
i i " i i
i i " i i
1 +
]
+
1 +
]
+
1 +
]
+
1 +
]
+
1f #ro.ect A-s e!pected return of :< had been compared to the pro.ectspecific
re/uired return of ;.7<, it would have been accepted. %herefore, #ro.ect A would
have been incorrectly re.ected if the firmwide &ACC had been used as its
benchmark.
LG/ 11-2- &n all-e+uity firm is considering the pro5ects shown "elow3 ,he ,-"ill rate is '
percent and the market risk premium is 0 percent3 4f the firm uses its current &CC
of 12 percent to e.aluate these pro5ects, which pro5ect<s=, if any, will "e incorrectly
accepted?
11-1$
Chapter 11, Solutions Cornett, Adair, and Nofsinger
Projet E!"ete# Return $et%
& 132? 23-
7 1632? 132
C 1$32? 13'
8 1032? 13/
Solution: 5sing the firm-s &ACC of )6 percent as the 133 benchmark, pro.ects B, C and $
would be accepted. 5sing e/uation ))6, the pro.ectspecific benchmarks for each
pro.ect should be:
( )
[ ]
( )
[ ]
( )
[ ]
( )
[ ]
@or )ro5ect &E
'? 23- 0?
03-?
@or )ro5ect 7E
'? 132 0?
123'?
@or )ro5ect CE
'? 13' 0?
1$31?
@or )ro5ect 8E
'? 13/ 0?
1-32?
" f " , f
" f " , f
" f " , f
" f " , f
i i " i i
i i " i i
i i " i i
i i " i i
1 +
]
+
1 +
]
+
1 +
]
+
1 +
]
+
1f #ro.ect C-s e!pected return of )A< had been compared to the pro.ectspecific
re/uired return of )A.:<, it would have been re.ected. %herefore, #ro.ect C would
have been incorrectly accepted if the firmwide &ACC had been used as its
benchmark.
LG0 11-2/ Suppose your firm has decided to use a di.isional &CC approach to analyFe
pro5ects3 ,he firm currently has ' di.isions, & through 8, with a.erage "etas for
each di.ision of 23/, 132, 13$ and 13/, respecti.ely3 4f all current and future pro5ects
will "e financed with half de"t and half e+uity, and if the current cost of e+uity
<"ased on an a.erage firm "eta of 132 and a current risk-free rate of 0 percent= is 1$
percent and the after-ta# yield on the company!s "onds is 1 percent, what will the
&CCs "e for each di.ision?
Solution: 5sing e/uation ))6, we can solve for the e!pected rate of return on the market:
11-1'
Chapter 11, Solutions Cornett, Adair, and Nofsinger
( )
( )
( )
( )
1$? 0? 132 0?
/? 0?
1$?
" f " , f
,
,
,
i i " i i
" i
" i
" i
1 +
]
+ 1
]
1
]
3eusing e/uation ))6, we can solve for the divisional costs of e/uity using the
average divisional betas:
( ) [ ]
( ) [ ]
( ) [ ]
( )
@or 8i.ision &E 0? 23/ 1$? 0? 123/?
@or 8i.ision 7E 0? 132 1$? 0? 1$?
@or 8i.ision CE 0? 13$ 1$? 0? 1'31?
@or 8i.ision 8E 0
" f " , f
" f " , f
" f " , f
" f " , f
i i " i i
i i " i i
i i " i i
i i " i i
1 + +
]
1 + +
]
1 + +
]
1 +
]
[ ] ? 13/ 1$? 0? 1/3/? +
?inally, we can solve for the divisional &ACCs using e/uation ))):
( )
( )
( )
@or 8i.ision &E &CC 1 3- 123/? 3- 1? 63$?
@or 8i.ision 7E &CC 1 3- 1$? 3- 1? 123-?
@or 8i.ision CE &CC 1 3- 1'31? 3- 1? 113'?
@or 8i.isio
" $ C
" $ C
" $ C
" $
i i %
" # $ " # $
" $
i i %
" # $ " # $
" $
i i %
" # $ " # $
+ +
+ + + +
+ +
+ + + +
+ +
+ + + +
( ) n 8E &CC 1 3- 1/3/? 3- 1? 123$?
" $ C
" $
i i %
" # $ " # $
+ +
+ + + +
Rese%r& It' ()eb*E!erises+, Fin#in- t&e $e.ore*T%! Cost o. /ebt0 i
D
@or component de"t costs, we!d like to use the yield to maturity on "onds that resem"le the
maturity of our potential de"t as possi"le3 Let!s assume that we want to find a "ond issue
with appro#imately 12 years until maturity <as of 9anuary, 2220= for 7ear Stearns3 Luckily,
7ear Stearns has +uite a few outstanding "ond issues to choose from, and we can access the
information on these issues on the GahooH @inance page3 Go to httpEDDfinance3yahoo3comD
and start "y clicking on I4n.estingJ and then I7ondsJ as shown to the rightE
,hen enter 7ear Stearns in the I7ond LookupJ "o# and click on ISearchJ as shown "elowE
Gou!ll "e presented with a list of 7ear Stearns! outstanding "onds sorted in order of
decreasing maturityE
:nce you!.e identified the "ond with the maturity closest to the maturity you want, click on
the I4ssueJ entry and look up the Gield to *aturity3
Gour turnE go to the GahooH @inance we" site and find the G,* on the "ond with a maturity
that!s as close as possi"le to 12 years from today!s date3
11-1-
Chapter 11, Solutions Cornett, Adair, and Nofsinger
Inte-r%te# 1ini%se, )ACC .or % Ne2 Projet
Lily*ac Studios, a national chain of photography studios, is considering opening up a chain
of coffee shopDart galleries3 hile the e#isting operations of the firm ha.e a "eta of 1310,
the new chain is e#pected to ha.e a "eta of 2313
Lily*ac currently has -22,222 shares of common stock outstanding, which are selling for
;/$302 per share, and a ;12 million dollar "ond issue, selling at 12' percent of par3 ,he
e#pected market risk premium is / percent, and the current risk-free rate is -3-?3 ,he
"onds pay an 1 percent semiannual coupon and mature in 22 years3
Lily*ac!s ne#t e#pected di.idend is ;'322 per share, and future di.idends are e#pected to
grow at '? per year3
,he current operations of the firm produce %74, of ;11 million per year, and the chain!s
operations are e#pected to add only ;2- million per year to that3 ,he new chain will "e
funded with /-? percent e+uity and $-? de"t, and estimated flotation costs are e#pected to
"e 12 percent and - percent, respecti.ely3
hat should "e the &CC for the new chain of coffee shops?
Solution: 5sing the constant growth formula along with the flotation cost of e/uity, )6 percent
of C=A.;6 will be C;.=>, so the cost of e/uity will be e/ual to:
1
2
;'322
32'
;/$302 ;03/-
3111$,or 1131$?
"
$
i g
# ?
+
1
+
1
+
' ;
1
+
1
]
&hich gives us an annual i
$
of :.)66><.
?inally, the current "B1% puts the firm in the A:< ta! bracket, so the additional
"B1% generated by the pro.ect will be ta!ed at an average marginal ta! rate of:
&hich gives us an afterta! cost of debt of :.)66><'().A79>*87.6;=A<
5sing these component costs for e/uity and debt, and taking the capital structure of
the new chain, we get a &ACC of:
11-10