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What is the divisional cost of equity capital

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Problem 1: Systems Medical has a capital structure consisting of 20% debt and 80% equity and intends on financing all future investment proposals at this capital structure. The firm is considering an investment in a new line of business. The typical firm in this new business line has a beta of 1.2 and a capital structure consisting of 10% debt and 90% equity. The corporate tax rate is 25% for all firms. The risk- free rate is 2% and the market risk premium is 10%. The firm has decided to assign a 6% pre-tax cost of debt to the new division. What is the divisional cost of equity capital for this new business line?

Reference no: EM132746253

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