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Appropriate cost of capital-super bikes inc

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Super Bikes (SB) Inc. is a company which manufactures bicycles and distributes to retailers across Canada. Its line of business is generally considered quite stable and low risk. SB Inc. would like to invest in a new division to manufacture skateboards. Currently, SB Inc. has a cost of debt (before tax) of 5% and its stock has a beta of 0.6. The firm's debt-equity ratio is 0.7. The firm has identified another company (Free Wheels Inc) whose main business is similar to this project. Free Wheels Inc. has a cost of debt (before tax) of 8%, a beta of 2.5, tax rate of 45% and a debt-equity ratio of 0.4. 3 SB Inc. has an effective tax rate of 35%. The expected return on the market is 10% and the risk free rate of interest is 4%. What is the appropriate cost of capital to apply to SB Inc.'s proposed expansion into the skateboard manufacturing business?

Reference no: EM132674647

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