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Question:
a) Sandusky Corporation has hired you to investigate the weighted average cost of capital (WACC) that the firm would face at different capital expenditure levels over the coming year. After some investigation, you have gathered the following information:
Construct a labeled graph showing the weighted average cost of capital faced by the firm. Be sure to show all intermediate calculations.
b) Assume that the most important capital spending project that Sandusky hasunder consideration is the acquisition of a smaller, rival firm, for a cost of $10 million. The internal rate of return for this project has been estimated as 9 percent. Using the information from the first part of this question, determine whether the proposed acquisition should go forward. Be sure to support your recommendation with an explanation.
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