Current ($) ) | Target ($) | |

Book Value of Debt | 62 | 62 |

Market Value of Debt | 59 | 63 |

Book Value of Shareholder’s Equity | 78 | 88 |

Market Value of Shareholder’s Equity | 230 | 240 |

- Option : B
- Explanation : Use the market values of debt and equity to calculate their weights. wd = $63 / ($63 + $240) = 0.208 we = $240 / ($63 + $240) = 0.792.

- A
Using the new debt-to-equity ratio of Budweiser that would result from the additional $45 million debt and $65 million equity is appropriate.

- B
Using the current debt-to-equity ratio of 0.55 is appropriate.

- C
Using the current debt-to-equity ratio of 0.55 is not appropriate, but the debt-to-equity ratio of the new product line i.e. 0.69 is appropriate.

- Option : C
- Explanation : When making adjustments from the asset beta, derived from the comparables, to calculate the equity beta of the new product, the correct approach is to use the debt-to-equity ratio of the new product line.

- Option : B
- Explanation : The point at which the marginal cost of capital intersects the investment opportunity schedule is the optimal capital.

Source of capital | Capital structure proportion | Marginal after-tax cost |

Long-term debt | 30% | 12% |

Preferred stock | 5% | 15% |

Common equity | 65% | 20% |

- Option : B
- Explanation : The WACC of the company is calculated as follows: 0.3(12%) + 0.05(15%) + 0.65(20%) = 17.35%. To have a positive NPV, a project must have an IRR greater than the WACC used to calculate the NPV. Only the storage project has a NPV greater than $0 (at the company’s WACC of 17.35%), therefore only the storage project has an IRR that exceeds 17.35%.

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