Business, 15.10.2020 09:01 kateferguson9852

Orange Inc., an orange juice producer with a current debt-to-equity ratio of 2, is considering expanding its operations to produce toothpaste. Unsurprisingly, the toothpaste industry faces a different set of risks than the orange juice industry. However, the executives at Orange Inc. observe that Paste Inc., a toothpaste company, has a cost of equity of 12%, a cost of debt of 6%, and a debt-to-value ratio of 40%. Orange Inc. plans to finance its expansion into toothpaste production with 50% debt and 50% equity. The cost of debt for Orange Inc. is also 6%, and the corporate tax rate is 25%. Required:
Solve for the discount rate that Orange Inc. should use when evaluating whether to go forward with the expansion.

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Orange Inc., an orange juice producer with a current debt-to-equity ratio of 2, is considering expan...

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