hard · Principles of Finance cost-of-capital-structure
A firm with a corporate WACC of 10% is evaluating a diversifying project in an industry where the average levered equity β is 1.50 and the average market debt-to-equity ratio is 0.60. The firm's marginal tax rate is 25%, the risk-free rate is 4%, and the equity risk premium is 6%.
If the firm intends to finance this specific project with a D/E ratio of 1.00 and its pre-tax cost of debt for this project is 6%, what is the appropriate risk-adjusted hurdle rate?
- 8.20%
- 9.68%
- 11.15%
- 10.43%
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