Branson Works for a Firm That Is Expanding into a Completely

question 31

Multiple Choice

Branson works for a firm that is expanding into a completely new line of business.He has been asked to determine an appropriate WACC for an average-risk project in the expansion division.Branson finds two publicly traded stand-alone firms that produce the same products as his new division.The average of the two firm's betas is 1.40.Further,he determines that the expected return on the market portfolio is 11.00% and the risk-free rate of return is 3.00%.Branson's firm finances 70% of its projects with equity and 30% with debt,and has a before-tax cost of debt of 8% and a corporate tax rate of 20%.What is the WACC for the new line of business?

• A)About 12.64%
• B)About 13.12%
• C)About 10.78%
• D)About 11.86%

Recognize the importance of context such as company background, industry, and economic setting in analyzing financial statements.

Understand the methods and importance of horizontal and vertical analyses in evaluating financial performance and condition.

Comprehend the purpose and process of financial reporting for decision making.

Apply guidelines and rules-of-thumb in financial analysis.

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Definitions:

Striking Employees

Workers who refuse to work as part of a collective effort to protest for better labor conditions, wages, or other employment issues.

Persuade People

The act of convincing or influencing someone to do or believe something through reasoning or argument.

Business With Employer

Engagements or interactions between an employee and their employer beyond the standard terms of employment, often requiring careful ethical consideration.

Collective Agreement

A written contract negotiated between an employer and a union representing the employees, outlining terms of employment.