The Across town Company has an equity beta, fiL, of .5 and 50% debt in its capital structure. The company has risk-free debt that costs 6% before taxes, and the expected rate of return on the market is 18%. Across town is considering the acquisition of a new project in the peanutraising agribusiness that is expected to yield 25% on after-tax operating cash flows. The Carternut Company, which is the same product line (and risk class) as the project being considered, has an equity beta, )3,, of 2.0 and has 10% debt in its capital structure. If Across town finances the new project with 50% debt, should it be accepted or rejected? Assume that the marginal tax rate, for both companies is 50%.
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