Albright Properties, Inc. (API) has three divisions: The leveraged beta for API is 1.2. API has a

Question:

Albright Properties, Inc. (API) has three divisions:

The leveraged beta for API is 1.2. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Services Division's capital structure is 80 percent debt and 20 percent equity. API is planning to finance new projects in that division with a capital structure of 90 percent debt and 10 percent equity. The risk-free rate is 9 percent, and the market risk premium is 8.3 percent. The pretax cost of debt to API is 19 percent. The tax rate is 40 percent. What discount rate should API apply to the cash flows from "new" projects in the Financial Services Division?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...