Florida Corp.is calculating the appropriate rate for discounting cash flows on a project valued using the APV method.Florida's target debt ratio (D/(D+E))in market value terms is 50%,and the yield-to-maturity on its outstanding debt is 6%.A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E))of 40%.Assume a risk-free rate of 5% and a market risk premium of 8%.Florida's tax rate is 40%.What discount rate should Florida use?
A) 7.66%
B) 11.02%
C) 11.72%
D) 18.44%

Question

Quizplus · Accepted Answer

Β_A = (E/V)β_E = (0.6)1.4 = 0.84 K_E = 5% + 0.84(8%)= 11.72%