Introduction To Capital Budgeting/Investment Valuation
Mary Francis has just returned to her office after attending preliminary discussions with investment bankers. Her last meeting regarding the intended capital structure of Apix went well, and she calls you into her office to discuss the next steps.“We will need to determine the required return for our intended project so that we have a decision criteria defined for the project,” she says.“Do you have the information I need to describe capital structure and to calculate the weighted average cost of capital (WACC)?” you ask.“I do,” she smiles. “We can determine the target WACC for Apix Printing Inc., given these assumptions,” she says as she hands you a piece of paper that says the following:
Weights of 40% debt and 60% common equity (no preferred equity)
A 35% tax rate
Cost of debt is 8%
Beta of the company is 1.5
Risk-free rate is 2%
Return on the market is 11%