Stewart's Is Considering a New Project

question 37

Multiple Choice

Stewart's is considering a new project. The company has a debt-equity ratio of 0.72. The company's cost of equity is 15.1 percent, and the aftertax cost of debt is 7.2 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +2 percent. What is the WACC it should use for the project?

• A) 12.53 percent
• B) 12.98 percent
• C) 13.79 percent
• D) 14.14 percent
• E) 14.68 percent

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Definitions:

Direct Method

A cash flow statement preparation approach where actual cash flow information from the company's operations is used, as opposed to indirect methods which adjust net income.

Sales Adjusted

The revised value of sales after accounting for returns, allowances, and discounts.

Cash Basis

A financial recording technique that acknowledges income and expenditures solely upon the actual exchange of cash.

Balance Sheet Accounts

Accounts displayed on the balance sheet that represent the company's assets, liabilities, and equity at a point in time.