What cost of capital would you recommend the managers use

Reference no: EM13303502

Tommy Tinker Toys Inc. is considering a capital budgeting project that is unrelated to their current investments. The proposed project will be 40% debt financed at rd = 11.25%. They have identified three firms that they believe are basically comparable to the capital budgeting project under consideration, and they have collected the information about those comparable firms as shown below. Assume the following hold for all firms: (1) rM = 15%, (2) rf = 7%, (3) T = 0.35, (4) T* = 0.2, and (5) the total debt is the number of bonds indicated, each with a par value of $1,000 and 10 years to maturity. What cost of capital would you recommend the managers use to evaluate the proposed capital budgeting project?

Firm Stock Beta Stock Price #Shares Bond Price Coupon #Bonds
A 1.10 $25 1 million $1,100 12% 10,700
B 1.20 $30 2 million $900 10% 67,000
C 1.15 $22 5 million $850 8% 32,350

Reference no: EM13303502

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