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Astor Industrial Supply Astor had combined earnings before interest and taxes of $110 million last year which 40 percent was from its EMI Shielding. Both the book and the market value of debt is $90 million and market equity capital of $210 million. The unlevered cost of equity is 12 percent while the pre-tax cost of debt is 8 percent. The tax rate is 28 percent. 1. What is the firm’s weighted average cost of capital? Astor management felt that the risk of each division is different, and they were not sure about using the corporate cost of capital to evaluate the two new projects. Thus, the management decided to look at the risk-adjusted of capital for each division. Table below shows information for both projects: 4% 1 EMI Shielding Risk Free Rate Unlevered beta MRP Debt % Equity Fabrication & Machining Risk Free Rate Unlevered beta MRP Debt % Equity 6% 40% 60% 4% 1.2 6% 30% 70% $4 million for 4 years 2 million per year Cash flow $3 million for 5 years Cash flow Initial Investment $1.5 million per year Initial Investment 2. What is the cost of capital for each division? 3. What is the net present value of each project? 4. Which project would you recommend? Explain your recommendation in detail.


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