Give your assessment of the relative costs of Type I and Type II errors in the following situations where a decision is pending: a. A new synthetic feed additive is….
Ultra More Ltd. operates in a market where the risk-free rate is 4%, the return on the market portfolio is 12%, and only a corporate income tax is applied, at 25%.
Ultra More Ltd. operates in a market where the risk-free rate is 4%, the return on the market portfolio is 12%, and only a corporate income tax is applied, at 25%. Twenty percent of the company ’ s capital is financed by debt (riskfree), and its shares have a β risk factor of 1.75. The company is considering a project in its line of business (same risk profile) offering a 14.5% post-tax return. The company can finance the project by raising new capital, comprised 40% of risk-free debt. a. Calculate the cost-effectiveness of investing in this project considering the structure of its financing capital. b. Should the company invest in the project if the new capital has the same structure as the company ’ s existing capital? c. In light of your answers to parts (a) and (b) above, is your calculation in part (a) correct for all capital amounts required for the project? Should the project be implemented according to part (a) or part (b)?