Infrastructure related projects spanning construction

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Reference no: EM131012206

Predators is a multi-divisional firm involved in a number of infrastructure related projects spanning construction, engineering design, and power transmission. To finance its growth during this period of high government spending, new stocks and bonds can be issued in any amount. New bonds would pay a 6% annual coupon. Covenants on the firm's existing bonds limit it to a maximum debt/equity ratio of 0.8 and its tax rate is 30%. Since the company is involved with a number of different projects, your supervisor has asked you to use the pure play approach to estimate the appropriate cost of capital for the construction division. As a comparison, he has provided you with the following information regarding two of the firm's construction-focused competitors. Diggem Inc: this year's dividend = $1.65, sustainable dividend growth = 6%, stock price = $18.45, D/E = 0.6, tax rate = 25%, rD = 6% Skyreach Inc: Beta = 1.7, D/E = 0.9, Risk-free rate = 2%, expected market return = 10.65%, tax rate = 20%, rD = 8% Assuming that Predators maintains a constant debt/equity ratio of 0.8, what is Predators appropriate cost of capital for a project in the construction division?

Reference no: EM131012206

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