The total book value of WTC’s equity is $80 million and book value per share outstanding is $20. The stock of WTC is currently selling for a price of $35 per share and the beta of WTC is 1.15. The bonds of WTC have a face value of $40 million and sell at a price of 110 percent of face value. The yield to maturity on the bonds is 6.5 percent and the firm’s tax rate is 35 percent. E(Rm) = 8% and Rf = 1%. Suppose the company is considering the following expansion projects. How would you calculate the required rate of return to use in the NPV analysis of the following: Explain.
(a) The company is considering an expansion to double the production of its current product. The company will issue either equity or debt (but not both) to pay for the expansion.
(b) The company is considering adding a new product in a different line of business that is unrelated to their current product.
Note: Please be sure to show the work and all formulas involved.