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The Wilson Bat Company has, at market value, $300,000 in bonds and $700,000 in stock outstanding. The coupon rate on the debt, which is currently...

The Wilson Bat Company has, at market value, $300,000 in bonds and $700,000 in stock outstanding.  The coupon rate on the debt, which is currently selling at par, is 7%.  The company’s current stock price is $20, with an equity beta of 1.8 and an expected dividend next year of $1.40 which is expected to grow at 6% indefinitely.  The company faces a corporate tax rate of 25%.  

Wilson is considering purchasing Harrison Balls, Inc.  As part of its acquisition research, Wilson has determined that the average beta for ball manufacturers is 1.2.  The current risk-free rate is 4%, and the current return on the S&P 500 is 8%.

Calculate Wilson’s WACC.  The CFO directs that in calculating this WACC you are to calculate the equity return using the CAPM. 

 If Wilson can expect a return of 9% on its investment in Harrison, should they complete the purchase?  Explain?

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