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4. Adjusting WACC when the project is financed with different debt ratios In Part 2, we assume that Sangria's crusher project is financed in the same debt–equity ratio as the company as a whole (40% debt ratio). What if that is not true? For example, what if Sangria's perpetual crusher project supports only 20% debt, versus 40% for Sangria overall? Moving from 40% to 20% debt may change all the inputs to the WACC formula. Obviously, the financing weights change. But the cost of equity R_E is less, because financial risk is reduced. The cost of debt may be lower too, but here we assume it stays at 6% when the debt ratio is 20%. Recall from part 2 that Sangria's cost of equity at 40% debt ratio is 12.4%. Question 4: What is appropriate discount rate for Sangria's crusher project if it supports only 20% debt ratio?

          4. Adjusting WACC when the project is financed with different debt ratios
In Part 2, we assume that Sangria's crusher project is financed in the same debt–equity ratio as the company as a whole (40% debt ratio). What if that is not true? For example, what if Sangria's perpetual crusher project supports only 20% debt, versus 40% for Sangria overall?
Moving from 40% to 20% debt may change all the inputs to the WACC formula. Obviously, the financing weights change. But the cost of equity R_E is less, because financial risk is reduced. The cost of debt may be lower too, but here we assume it stays at 6% when the debt ratio is 20%.
Recall from part 2 that Sangria's cost of equity at 40% debt ratio is 12.4%.
Question 4: What is appropriate discount rate for Sangria's crusher project if it supports only 20% debt ratio?

4. Adjusting WACC when the project is financed with different debt ratios
In Part 2, we assume that Sangria's crusher project is financed in the same debt–equity ratio as the company as a whole (40% debt ratio). What if that is not true? For example, what if Sangria's perpetual crusher project supports only 20% debt, versus 40% for Sangria overall?
Moving from 40% to 20% debt may change all the inputs to the WACC formula. Obviously, the financing weights change. But the cost of equity RE is less, because financial risk is reduced. The cost of debt may be lower too, but here we assume it stays at 6% when the debt ratio is 20%.
Recall from part 2 that Sangria's cost of equity at 40% debt ratio is 12.4%.
Question 4: What is appropriate discount rate for Sangria's crusher project if it supports only 20% debt ratio?

Added by Edgar S.

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