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Finance for non-financial managers

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Finance for Non-Financial Managers

Suppose that an incorporated dairy is considering opening up a roadside ice cream parlor. The dairy is currently all-equity financed, but could borrow money at a pretax cost of 9% by mortgaging their existing operations. The owners could borrow money on a personal line of credit at 12%, and ice cream parlors normally have a cost of debt closer to 13%. If they plan on financing half of the ice cream parlor with debt, what before-tax cost of debt should the firm use when calculating the WACC to evaluate the new project?

Reference no: EM132422052

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