Technico plans to start a new product division that will have a capital structure of 70 percent debt and 30 percent equity.The levered beta for this division has been estimated to be 2.02.What will be Technico's weighted cost of capital for this new division if the after-tax cost of debt is 7 percent, the risk-free rate is 8 percent, and the market risk premium is 5 percent?
A)14.77%
B)10.33%
C)18.1%
D)1.03%

Question

Quizplus · Accepted Answer

kₑ = 0.08 + 2.02(0.05) = 0.181
k* = 0.7(0.07) + 0.3(0.181) = 0.1033 or 10.33%

Technico Plans to Start a New Product Division That Will