Question

Starbucks wants to use the subjective approach to evaluate a new project. They are considering expanding their stores and renting office space to small business owners. They will have a separate reception area and online scheduling for those that want to use the office space. Starbucks has a WACC of 12%. What would be the WACC for this new project?
Category Examples Adjustment Factor
High risk New products 6%
Moderate risk Cost savings, Expansion
of existing products 0
Low risk Replacement of existing
equipment (4)
Mandatory Safety equipment n/a
A) 16%.
B) 12%.
C) 24%.
D) 18%.

Answer 1

Answer:

D) 18%

Explanation:

Starbucks wants to use the subjective approach to evaluate a new project. They are considering expanding their stores and renting office space to small business owners. They will have a separate reception area and online scheduling for those that want to use the office space. Starbucks has a WACC of 12%.

The objective is to use a subjective approach to evaluate the new project

The given  table can be well presented as follows:

Category                 Examples                                Adjustment Factor

High risk                  New products                            6%

Moderate risk    Cost savings, Expansion                 0

                            of existing products

Low risk                 Replacement of existing             -4%

                                equipment

Mandatory             Safety  equipment                      n/a

From the table, we can deduce that :

the WACC for this new project = Current WACC + Adjustment Factor (High Risk)

the WACC for this new project = ( 12% + 6%)

the WACC for this new project = 18%