1)Your employer is developing Project 11 to compete directly with Private Label Software (PLS). You are assigned the task of finding the cost of capital for this project. Your analysis suggests that Project 11 will have the same assets and products as PLS. Further, you find that the current required return on the equity capital of PLS is 19.7% and PLS's debt to equity ratio is equal to 0.8. Furthermore, you estimate the risk free rate to be 3.5% and the expected return on the market to be 9.5%. Assume the tax rate is 0%.

a)What is the beta of PLS's assets (unlevered beta) (assume the tax rate is 0%)? (2 marks)

b)The current debt ratio of your company is 0.4. However, the plan is to leverage Project 11 to have a lower debt ratio of 0.25. What would you estimate the cost of equity capital of Project 11 (assume the tax rate is 0%)? (2 marks)

Answer rating: 100% (QA)

Answer a To calculate the beta of PLSs assets unlevered beta we can use the following formula Unleve... View the full answer