l. Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have on average the following characteristics:
-Their capital structure is 10% debt and 90% common equity.
-Their cost of debt is typically 12%.
-The beta is 1.7.
Given this information, what would your estimate be for the new division’s cost of capital? Risk-free rate 5.6% Market risk premium 6.0% rs = Beta 1.7 Target Debt Ratio 10% rd 12% Tax Rate 40%
WACC = (wd × rd) × (1 – T) + (ws × rs)
WACC =( ) x 60% + 0.0 %
WACC =
Division WACC 0.00 %
Company WACC 0.00 %