Reference no: EM132083445

Dunkin currently has a capital structure of 60 percent debt and 40 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 80 percent debt and 20 percent equity. Dunkin has a current beta of 2.1, but is not sure what the beta for the new division will be. AMX is a firm that produces a product similar to the product under consideration by Dunkin. AMX has a beta of 1.8, a capital structure of 35 percent debt and 65 percent equity and a marginal tax rate of 40 percent. Dunkin' tax rate is 40 percent. What will be Dunkin's weighted cost of capital for this new division if the after-tax cost of debt is 8 percent, the risk-free rate is 7 percent, and the market risk premium is 9 percent?

For this question, I have already calculated and got levered beta is 4.6257 and Ke is 0.162514. However, the question is weighted cost of capital and the formula is

WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)].