RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures

QUESTION

RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures (described in Problem 19) by issuing new debt and equity. The firm estimates that the direct issuing costs will come to $7 million. How should it account for these costs in evaluating the project? Should RiverRocks go ahead with the project?
If RiverRocks is going to acquire Raft Adventures, then it should use a discount rate that is appropriate for the risk of Raft Adventures cash flows. That should be the WACC

f Raft Adventures, which is 15%. So, RiverRocks should use 15% as the discount rate for its evaluation of the acquisition.

ANSWER:

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