Planning to expand into the search business by acquiring

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Digital Equipment Corporation (DEC) is planning to expand into the search business by acquiring Fetch Inc. Unfortunately, the valuation of Fetch is difficult because Fetch is not publicly traded. DEC's target debt to equity ratio is 40% and its pre-tax borrowing rate is 12%. DEC has identified Wohoo Inc. a publicly traded search firm for its pure play computations. Wohoo uses a debt to equity ratio of 50%. Wohoo's equity beta is 2, and its pre-tax cost of borrowing is 15%. The risk-free rate is 7% and the expected return on the market portfolio is 15%. Both firms face a corporate tax rate of 35%. Assume zero debt beta. Cost of capital that DEC should use to value Fetch is:

Reference no: EM131548069

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