Buster's target debt-to-equity ratio is 0.65,its cost of equity is 13.7 percent,and its beta is 0.9.The after-tax cost of debt is 5.8 percent,the tax rate is 34 percent,and the risk-free rate is 2.3 percent.What discount rate should be assigned to a new project the firm is considering if the project's beta is estimated at 0.87?

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Quizplus · Accepted Answer

0.137 = 0.023 + 0.9(MRP) MRP = 0.1267 R_SProject = 0.023 + 0.87(0.1267)= 0.1332,or 13.32% WACC_Project = (1 / 1.65)(0.1332)+ (0.65 / 1.65)(0.058)= 0.1036,or 10.36%

Buster's Target Debt-To-Equity Ratio Is 0