Randy's
Ranch House Café has an adjusted WACC of 10.08%. The company has a
capital structure consisting of 70% equity and 30% debt, a cost of
equity of 12.00%, a before-tax cost of debt of 8.00%, and a tax rate of
30%. Randy is considering expanding by building a new Café in a distant
city and considers the project to be riskier than his current operation.
He estimates his existing beta to be 1.0, the required return on the
market portfolio to be 12.00%, the risk-free rate to be 3.00%, and the
beta for the new project to be 1.40. Given this information, and
assuming the cost of debt will not change if Randy undertakes the new
project, what adjusted WACC should be use in his decision-making? 11
A) 10.08%
B) 12.60%
C) 13.32%
D) 14.16%
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