please help Peter's Pet Foods has a WACC of 12.5 percent and is considering manufacturing pet...
Peter's Pet Foods has a WACC of 12.5 percent and is considering manufacturing pet toys. Tim's Toys specializes in pet toys and has a WACC of 10.5 percent. What discount rate should Peter's Pet Foods use to evaluate this investment?
Homework Answers
Peter's Pet Foods - WACC - 12.5%
Tim's Toy - WACC - 10.5%
peter's pet foods is engaged in the business of selling Pet foods. It is considering to manufacture Pet toys. So it has to use the Cost of capital aplicable to the business. the cost of capital of similar business - Tim's Toy is 10.5%. So WACC of 10.5% has to be considered.
Assumptions:
1. Capital Structure of both of the companies are same. ie, the debt equity ratio ,cost of debt, and tax rates applicable to the company are same
If the capital structure or cost of debt or tax rates is different, Unlevered cost of capital of Comparative business (Tim's toy) has to be found and then it has to be levered as per the capital structure of the Peter's pets.
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