Estimate firm a cost of equity for the new business

Reference no: EM13269812

Suppose that Firm A is considering entering a business similar to Firm B, a relatively small firm in a single line of business. Firm A is currently financed with 65% debt and 35% equity. Firm B, the pure-play firm, has a beta of 0.85 and is financed with 45% debt and 55% equity. Firm B's marginal tax rate is 34% and Firm A's marginal tax rate is 39%. If the riskless rate is 3% and the market return is 8%, estimate Firm A's cost of equity for the new business using the CAPM.

Reference no: EM13269812

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