Liberty Ltd. is large international company in the UK. The company is considering a project...
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Liberty Ltd. is large international company in the UK. The company is considering a project that will result in initial after-tax cash savings of 2.5 million at the end of the first year, and these savings will grow at a rate of 4% per year indefinitely. The firm has a target debtequity ratio of 0.6 a pre tax cost of debt of 6.25%. The tax rate is 20%. The equity currently has a beta of 1.25, market risk premium is 6.5%, and 5.5% risk free rate.
a) In calculating WACC, if book value had to be used for either debt or equity, which one should be chosen? Explain
b) Calculate the WACC for Liberty Ltd.
c) What is the maximum upfront cost that Liberty should pay for the project? Justify your answer.
d) Why might using a single company cost of capital to evaluate projects lead to erroneous investment decisions?
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