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Swizer industries has two separate divisions. Division X has less risk so its projects are assigned a discount rate equal to the firm’s WACC minus 3 percent. Division Y has more risk and its projects assigned a rate equal to the firm’s WACC plus 4 percent. The company has a debt equity ratio of .55 and a tax rate of 30 percent. The cost of equity is 15.0 percent and the after-tax cost of debt is 5.0 percent. Presently, each division is considering a new project. Division Y’s project provides a 12.0 percent rate of return and division X’s project provides a 7.0 percent return. Calculate the company’s WACC (rounded to the nearest tenth percent).

Given the information in the previous problem calculate the project WACC for division X. Also calculate the project WACC for division Y. Which projects, if any should the company accept?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92426481

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