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Long-term debt and marginal tax rates

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The Warren Antique Car Company (...happens to have abbreviation WACC, lol) has an equity beta, b, of 0.8 and 40% debt in its capital structure. The company has risk-free debt that costs 3% before taxes, and the expected rate of return on the market is 10%. Warren is considering the acquisition of a new project in the micro car manufacturing business that is expected to yield 20% on after-tax operating cash flows. Mittal's Mini's, which is in the same product line (and risk class) as the project being considered, has an equity beta, b, of 1.3 and has 20% debt in its capital structure. Warren will finance the new project with 30% long-term debt and marginal tax rates are 21% on everything. Find the WACC for the new project and decide what Warren should do.

Reference no: EM132517586

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