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Companies A and B are both pure play, 100% equity firms in different industries. A...

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Finance

Companies A and B are both pure play, 100% equity firms in different industries. A is a biotech company with a WACC of 16%, while B is a retail chain of drugstores with a WACC of 10%. Assume that each company is typical for its industry, and that its WACC reflects the underlying risk of that industry. B is thinking of making an investment in biotech. In analyzing this new project, which will be typical for biotech, what discount rate should B (the drugstore chain) use?

A.

Bs new, future WACC after the biotech project has been accepted (taking into account the new projects value).

B.

Bs current WACC, 10%.

C.

As current WACC, 16%.

D.

13% (halfway between the two current WACCs).

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