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Business, 11.02.2020 02:13 jackie6852

Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Florida’s target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity β of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Florida’s tax rate is 40%.
1. What discount rate should Florida use?
a. 7.66%
b. 11.02%
c. 11.72%
d. 18.44%

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