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

D) 18%

Step-by-step 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%