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%

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Definitions:

Longitudinal Study

A research design that involves repeated observations of the same variables (e.g., people) over short or long periods of time.

Cross-Sectional Study

A study that analyzes data from a population at a specific point in time.

Case-Control Study

A type of observational study that compares individuals with a specific condition or disease (cases) to others who do not have the condition (controls), looking for factors that may contribute to the disease.

Longitudinal Study

A research design that involves repeated observations of the same variables over short or long periods of time to detect patterns, trends, or changes.