1. Levered Inc’s market value of equity is $60 million and market value of its debt is $50 million. Levered’s pretax cos

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1. Levered Inc’s market value of equity is $60 million and
market value of its debt is $50 million. Levered’s pretax cost of
debt is 9.0%, while corporate tax rate is 34%. The risk free rate
is 4%, while the expected market return is 12%. Levered’s firm
level beta is 0.70.
a) Calculate market risk premium
b) Calculate after-tax cost of debt
c) Calculate cost of equity
d) Calculate company’s Rwacc
In part (e) suppose that this company considers a project that
will bring $150,000 at the end of year 1 and $100,000 at the end of
year 2. The initial investment is $250,000. The project will be
financed by the same combination of debt and equity.
e) Should company go ahead with the project? Explain your
answer