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Baker Hughes is in the oil and gas equipment and services industry. Suppose that Baker Hughes managers are considering a new oilfield servicing operation that would cost $250 million. Its book debt-to-equity ratio would increase only slightly, so its credit ratings would not change. The managers consider raising funds for the project by selling $250 million in new bonds with a maturity of 5 years. The managers judge that the proposed project would have about the same risk as Baker Hughes's existing operations. The firm has an outstanding bond that matures in about 5 years and has a yield to maturity of 6.866%. Treasury bonds with the same years to maturity have yields of 3.557%.
Estimate the required annual rate of return on Baker Hughes's new bond that the company plans to issue to fund the new project.
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