A company with an average WACC of 10% adjusts for risk by adding 2% for high...

A company with an average WACC of 10% adjusts for risk by adding 2% for high risk projects and subjecting 2% for low risk projects. Which of the following projects should the company accept? Only one option can be an answer.

A)An average risk project with an IRR of 10%

B)Low risk project with an IRR of 7%

C)High risk project with an IRR of 13%

D)High risk project with IRR of 11%

Solutions

Expert Solution

Adjusted WACC for High risk Project 10%+2% = 12%

For Low Risk Project 10%-2% = 8%

For Average Project 10%

Answer C)High risk project with an IRR of 13% because it will give Positive NPV

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A firm estimates that its average-risk projects have a WACC of 10%, its below-average risk projects...

A firm estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 9%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? A:Project B is of below-average risk and has a return of 9.5%. B:Project C is of above-average risk and has a return of 11.5%. C:Project A is of average risk and has a return of 9%....

Nihau Tech has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is...

Nihau Tech has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 11%. The CFO, Ms Chen, believes that this is the correct WACC for the company's average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO, Mr. Wu, disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company...

Suppose Tapley Inc. uses a WACC of 8% for below-average riskprojects, 10% for average-risk projects,...

Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?A). Project A, which has average risk and an IRR = 9%.B). Project B, which has below-average risk and an IRR = 8.5%.C). Project C, which has above-average risk and an IRR = 11%.D). Without information about the projects'...

(A) Please calculate the Weighted Average Cost of Capital (WACC) for the following company. Assumptions: Risk...

(A) Please calculate the Weighted Average Cost of Capital (WACC) for the following company. Assumptions: Risk free rate = 4.0%; Company’s spread = 2.0%; Expected return of the market = 9.0%; Company Beta = 1.10; Company debt to capitalization ratio = 40%; and Company tax rate = 30%. (Please be sure to show your calculations.) (B) Please define and explain the Hurdle Rate. (3 points)

A project has the following cash flows. This project is of average risk and the WACC...

A project has the following cash flows. This project is of average risk and the WACC is 0.1. Find the Net Present Value. Round your answer to two decimal places. Year 0 Year 1 Year 2 Year 3 Cash Flow -$91 $50 $40 $7

Question: Question:Evaluate the following statement: "Adding a high risk emerging market bond to a portfolio can...

Question: Question:Evaluate the following statement: "Adding a high risk emerging market bond to a portfolio can actually reduce overall portfolio risk." a)This statement is true because the correlations between emerging and developed market instruments are low, zero or negative. b)This statement is false because a high risk bond from a high risk market is too much to derive significant benefits. c)This statement is inconclusive because we don't know if the market is integrated or segmented. d)The statement is true but...

A company manufactures electronic components. 2 in 10 are of such high quality that they can...

A company manufactures electronic components. 2 in 10 are of such high quality that they can be sold at a premium. We refer to those high quality components as HQ components. A component is sampled at random for QA, and it is put back to the others after inspection. This process is done a total of 5 times. What is the probability that: At least 2 components are NOT HQ

WACC and optimal capital budget Adamson Corporation is considering four average-risk projects with the following costs...

WACC and optimal capital budget Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $48 per share. Also, its common...

2. Find the weighted average cost of capital for COSTCO a) explain how the WACC is...

2. Find the weighted average cost of capital for COSTCO a) explain how the WACC is calculated b) explain the WACC in the context of hurdle rate, return on invested capital(ROIC), an optimal capital structure, and an optimal capital budget.

Your division is considering two projects. Its WACC is 10% (weighted average cost of capital, that...

Your division is considering two projects. Its WACC is 10% (weighted average cost of capital, that represent a firm’s cost of capital in which each category of capital is proportionately weighted), the projects’ after-tax cash flows (in millions of dollars) would be as follows: Project A 0 = - $30 1 = - $ 5 2 = $ 10 3 = $ 15 4 = 20 Project B 0 = - $ 30 1 = $ 20 2 = $10...

Subjects