A firm with a corporatewide debt-to-equity ratio of 1:2, an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12%. The after-tax cost of debt is expected to remain at 7%.
a. What is the project's weighted average cost of capital? How does it compare with the parent's WACC?
b. If the project's equity beta is 1.21, what is its unlevered beta?