Reference no: EM13266843
Smeagal Industries is considering a new division, making pixie dust in a handy resealable pouch. THey intend to finance it with 60% equity, and 40 risk-free debt. They have identified the following comparison firm, and corresponding equity beta and capital structure (see below).
Comparison Firm Beta Debt Equity
Hermione, AG. 1.1 $3000 $10000
Assume risk-free rate is 4%, the reutrn on the market portfolio is 8%, the corporate tax rate is 30%, CAPM holds, and the comparison firm's debt is risk free. Use the following equation:
BETA(unlevered firm) = (Equity / (Equity + (1 - tax rate)*DEBT)) * BETA(levered firm)
a) Find the unleverd asset beta of Hermione.
b) Using that, find the unlevered cost of capital for the new divison.
c) Find the cost of equity for the new capital structure.
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