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Ammar has been tasked with estimating the appropriate cost of capital for his company's new...

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Finance

Ammar has been tasked with estimating the appropriate cost of capital for his company's new division. He has the following information about the firm's capital structure:

  • The firm has a D/E of 1.05.
  • The yield to maturity on the company's debt is 6.36%.
  • The CAPM suggests the firm's stock has a required return of 16.27%.
  • The firm has a marginal tax rate of 24%.
  • Finally, the CFO thinks the new division is riskier than the other divisions and decides to make a subjective adjustment by making the division's required return 2.50% higher than that of the typical project in the firm. What should Ammar's best estimate of the cost of capital be for the new division?

Multiple Choice 11.19% 12.91% 10.55% 4.26% 10.41%

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