XYZ is a video store chain based out of New York and is currently all...
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XYZ is a video store chain based out of New York and is currently all equity. They are contemplating entering into gaming industry. It is planning to finance projects with a final VW debt-to-value ratio of 25 percent (or a debt-to-equity ratio of 1/3). There is currently one firm in the gaming industry, GameStop (GS). This firm is financed with 40 percent debt and 60 percent equity. The beta of GSs equity is 1.5, and a borrowing rate of 12 percent, and VW expects to borrow for its gaming venture at 10 percent. The corporate tax rate for both firms is 30%, the market risk premium is 8.1 percent, and the treasury rate is 5%.
- What is the appropriate WACC for VW to use for its Gaming venture?
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