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?

Question

Quizplus · Accepted Answer

The discount rate for the project can be calculated using the Capital Asset Pricing Model (CAPM) formula: Cost of Equity = Risk-free rate + Beta * (Market return - Risk-free rate). Adjust the cost of equity for the project's beta and use the weighted average cost of capital (WACC) formula to find the discount rate.

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