Hula Enterprises is considering a new project to produce solar water heaters. The finance manager wishes...

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Finance

Hula Enterprises is considering a new project to produce solarwater heaters. The finance manager wishes to find an appropriaterisk adjusted discount rate for the project. The (equity) beta ofHot Water, a firm currently producing solar water heaters, is 1.2.Hot Water has a debt to total value ratio of 0.6. The expectedreturn on the market is 0.11, and the riskfree rate is 0.04.Suppose the corporate tax rate is 38 percent. Assume that debt isriskless throughout this problem. (Roundyour answers to 2 decimal places. (e.g., 0.16))
a. The expected return on the unlevered equity (return on asset,R₀) for the solar water heater project is ___%.
b. If Hula is an equity financed firm, the weighted average costof capital for the project is _ %.
c. If Hula has a debt to equity ratio of 1, the weighted averagecost of capital for the project is_____ %.
d. The finance manager believes that the solar water heaterproject can support 30 cents of debt for every dollar of assetvalue, i.e., the debt capacity is 30 cents for every dollar ofasset value. Hence she is not sure that the debt to equity ratio of1 used in the weighted average cost of capital calculation isvalid. Based on her belief, the appropriate debt ratio to use is_ %. The weighted average cost of capital that you willarrive at with this capital structure is ______%.

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4.2 Ratings (707 Votes)

a DE DAD 0610615 Levered Beta Unlevered Beta x 1 1 Tax Rate x DebtEquity 12 Unlevered Beta1103815 Unlevered Beta 062 As per CAPM expected return riskfree rate beta expected return on the market riskfree rate Expected return 4 See Answer

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Transcribed Image Text

Hula Enterprises is considering a new project to produce solarwater heaters. The finance manager wishes to find an appropriaterisk adjusted discount rate for the project. The (equity) beta ofHot Water, a firm currently producing solar water heaters, is 1.2.Hot Water has a debt to total value ratio of 0.6. The expectedreturn on the market is 0.11, and the riskfree rate is 0.04.Suppose the corporate tax rate is 38 percent. Assume that debt isriskless throughout this problem. (Roundyour answers to 2 decimal places. (e.g., 0.16))a.The expected return on the unlevered equity (return on asset,R0) for the solar water heater project is _______%.b.If Hula is an equity financed firm, the weighted average costof capital for the project is _______ %.c.If Hula has a debt to equity ratio of 1, the weighted averagecost of capital for the project is___________ %.d.The finance manager believes that the solar water heaterproject can support 30 cents of debt for every dollar of assetvalue, i.e., the debt capacity is 30 cents for every dollar ofasset value. Hence she is not sure that the debt to equity ratio of1 used in the weighted average cost of capital calculation isvalid. Based on her belief, the appropriate debt ratio to use is_________ %. The weighted average cost of capital that you willarrive at with this capital structure is __________%.

a.	The expected return on the unlevered equity (return on asset,R₀) for the solar water heater project is _______%.
b.	If Hula is an equity financed firm, the weighted average costof capital for the project is _______ %.
c.	If Hula has a debt to equity ratio of 1, the weighted averagecost of capital for the project is___________ %.
d.	The finance manager believes that the solar water heaterproject can support 30 cents of debt for every dollar of assetvalue, i.e., the debt capacity is 30 cents for every dollar ofasset value. Hence she is not sure that the debt to equity ratio of1 used in the weighted average cost of capital calculation isvalid. Based on her belief, the appropriate debt ratio to use is_________ %. The weighted average cost of capital that you willarrive at with this capital structure is __________%.