Q. Evaluate a proposed investment?
BMP Consulting (BMPC) conducted an analysis of Delta Corp. and found that the firm consists of two different divisions: Pet Lovers, a pet supply retail outlet, and Able Move, a long-distance moving company. Delta is currently considering a project related to pet supplies and has asked for BMPC's assistance with the analysis. As a part of its response, BMPC examined firms that operate within the industries of each of Delta's two divisions, finding the following:
|
Firm
|
Industry
|
Cost of capital
|
|
Not Just Dogs
|
Pet supply
|
8%
|
|
Canines and Felines
|
Pet supply
|
10%
|
|
Reliable Movers
|
Long-distance moving
|
14%
|
|
TransCanada Movers
|
Long distance moving
|
18%
|
a. When is it appropriate to use the firm's weighted average cost of capital (WACC) to evaluate a proposed investment?
b. Based on this information, what is a reasonable discount rate for BMPC to use in its assessment of the proposed pet supply project? Describe any assumptions that you make in arriving at this discount rate.
c. What would be the potential implications for Delta if WACC is used to evaluate the pet supply project?