Reference no: EM132144546

Philip Morris is reexamining the costs of capital it uses to decide on investments in its two primary businesses-food and tobacco. The two divisions have about the same market value. Philip Morris has an equity beta of 0.95 and a debt/equity ratio of 25%. The company's debt is priced to yield an expected return of 8%. The average equity beta of publicly traded firms in the tobacco business is 1.2, the average debt beta is 0.3, and the average debt/equity ratio of such firms is 20%. The average equity beta of publicly traded firms in the food business is 0.9, the average debt beta is close to zero, and the debt/equity ratio of such firms is 80%. The current interest rate is 7.1%. Estimate the cost of capital for each of the two businesses