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Tim works for WatermanCorp, a manufacturer of high-pressure industrial water pumps.
He reports directly to the CFO and she has asked him to calculate WatermanCorp's WACC.
He has gathered the following information about Waterman Corp: its market capitalization (its market value of equity) is $110 million, its beta is 1.4, the total book value of its debt is $50 million, it has $10 million cash, and its cost of debt (using the quoted yields on WatermanCorp's outstanding bond issues) is 5%.
In addition, the yield of the 10-year government bond (the risk-free rate) is 2%, the market risk premium is 6%, and the marginal corporate tax rate is 35%. Calculate WatermanCorp's WACC.
When is it appropriate to use this WACC to evaluate a new project? Calculate WatermanCorp's WACC. WACC (Round to two decimal places.)
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