Reference no: EM133121339

After graduating from the university, you work as an investment manager in one of the Fortune 500 companies. You are tasked by the Chief Finance Officer (CFO) to evaluate the cost of financing of an investment project which CFO believes that it will generate higher cash flows and enhance firm value. However, CFO concerns about the risk and financing sources of the project.

Required:

a). You believe that weighted average cost of capital (WACC) is the best measure for the cost of financing for an investment project. Write down WACC equation and the necessary steps (no calculation) how you carry out the estimation of WACC.

b). What factors affect WACC, i.e. cost of equity, cost of debt and capital structure?

c). Using firm's overall WACC to value a standalone investment project is inappropriate if itsrisk issignificantly different from firm's existing assets portfolio. What remedies you would consider for WACC of firm's investment project?

d). Firm raises the capital for its long-term investments by issuing shares (equity) and/or bond (borrowing) from the capital markets. And, firm will raise its capital as lower cost of financing as possible. When firm should issue shares to raise capital, and when firm should issue bond for financing? Explain your answers to CFO.