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
Multiple Choice
A) 16%.
B) 12%.
C) 24%.
D) 18%.
E) It cannot be determined.

Answer 1

Answer:

D) 18%.

Explanation:

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

WACC for this new project = 12% + 6%

WACC for this new project = 18%

Note: Attached as picture shows the reason for the chosen Adjustment factor