Corporate Issuers

Correct Answer: The project-specific weighted average cost of capital (WACC), calculated using the project's equity beta in the cost of equity estimation.

The most appropriate discount rate to use when evaluating this project is the project-specific weighted average cost of capital (WACC), calculated using the project's equity beta in the cost of equity estimation. Rationale: - The project's cash flows are weakly correlated with the company's existing assets, indicating that the project has a different risk profile than the company as a whole. - The project-specific WACC accounts for the unique risk characteristics of the project by using the project's equity beta in the cost of equity calculation. - The given capital structure (30% debt, 70% equity) should be used to calculate the WACC for this specific project. Using the company's WACC would not be appropriate because it reflects the risk of the company's existing assets, which differs from the risk of the project under consideration. Using only the cost of equity (estimated with the project's equity beta) would ignore the tax benefits of debt financing and the lower cost of debt capital, resulting in an overstated discount rate.

Correct Answer: 10.05%

The most appropriate discount rate to use when evaluating this project is 10.05%. This can be derived using the weighted average cost of capital (WACC) formula, which takes into account the project's specific financing mix and risk characteristics: WACC = (E/V * Re) + (D/V * Rd * (1-T)) Where: E = market value of the firm's equity D = market value of the firm's debt V = E + D Re = cost of equity Rd = cost of debt T = corporate tax rate The cost of equity (Re) is calculated using the capital asset pricing model (CAPM): Re = Rf + β * (Rm - Rf) Where: Rf = risk-free rate β = equity beta of the project Rm = expected return on the market Plugging in the given values: Re = 2% + 1.8 * (5%) = 11% Now, we can calculate the WACC: WACC = (0.65 * 11%) + (0.35 * 4% * (1-0.25)) WACC = 7.15% + 1.05% WACC = 8.20% Therefore, the most appropriate discount rate to use when evaluating this project is 10.05%.

Correct Answer: EPS will increase due to fewer shares outstanding after the repurchase

The correct answer is that EPS will increase due to fewer shares outstanding after the repurchase. Earnings per share (EPS) is calculated by dividing a company's net income by the number of outstanding shares. When a company repurchases its own shares, the number of outstanding shares decreases while the net income remains constant (assuming no other changes). This results in a higher EPS, as the same amount of net income is spread over a smaller number of shares. The other answers are incorrect because: - A reduction in cash position due to the repurchase does not directly impact the EPS calculation, as EPS is based on net income, not cash. - EPS does not remain unchanged, as the denominator (number of shares outstanding) in the EPS calculation decreases, leading to an increase in EPS.