Should tom swift accept the project

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Reference no: EM13270794

Tom swift has a target capital structure of 40% debt and 60% equity. Its estimated beta is 0.9. Tom Swift is evaluating a new project that is unrelated to its existing lines of business. However, it has identified three proxy firms exclusively engaged in this line of business. The average beta for these firms is 1.2, and their debt ratios average 50%. Tom Swift's new project has a projected return of 11.9%. The risk-free return is 10% and the market risk premium is 5%. All firms have a marginal tax rate of 40%. Tom Swift's before-tax cost of debt is 13%.

a. What is the unlevered project beta?

b. What is the beta of the project if undertaken by Tom Swift, assuming the company maintains its target capital structure?

c. Should Tom Swift accept the project?

Reference no: EM13270794

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