iii. If the firm levers up to 60% with cost of debt 5% what will be the WACC of the company?

Keloff´s is a well known cereal brand. Over the previous years its equity beta has been 0.8. Currently, the firm faces interest rate of 2%, cost of debt 4%, market risk premium 8% and corporate tax rate 40%. In the past the firm has maintained a market leverage ratio 40% with continuous rebalancing. For each of the questions below choose the closest answer.

i. What is the WACC of the company currently?

Mike is a sportswear company. Its free cash flow at the end of last year was 2.5B EUR. It is expected that its cash flow will grow at 5% per year indefinitely. Mike has non-operational assets worth 10B EUR and its currently debt free. There are 3 competitors of Mike: Abidas, Leopard and OB with corresponding unlevered betas of 1.2, 1.4 and 1.6. The risk free rate is 2% and the market risk premium 6%. The corporate tax rate is 20%. For each of the questions below choose the closest answer.

i) If Mike´s unlevered beta is the average of the industry, what is Mike´s cost of capital?

iv) If management wants to lever up to 30% using the same debt growth rate as in the previous question, what should be the initial level of borrowing?

ii) What is the unlevered cost of capital of the company?

v) The borrowing scheme is announced to the market. The management executes its first recapitalization, using the initial debt proceeds to repurchase shares. At what price will it repurchase shares?

Consider a project with uncertain cash flows where sales volume and unit price are both variable. If you were to use Monte Carlo Simulation to evaluate the project’s NPV, which of the following best describes how you would incorporate these uncertainties into the simulation?

In capital budgeting, what is the main goal when deciding which projects to invest in?