Canada Telecom, a telephone company, is contemplating investing in a project in multimedia applications. The company is currently 30% debt financed. The company\'s analysts have estimated the project\'s cash flows but need to determine the project cost of capital. Canada Telecom analysts assess that their new multimedia division has a target debt-equity ratio of 0.6, and a cost of debt of 6.5%. In addition, the risk-free rate is 3%, and market risk premium is 5%. XYZ Co. is a pure play in the multimedia business and is 35% debt financed. Its current equity beta is 1.05. Assume that both Canada Telecom and XYZ have a tax rate of 35%, and a debt beta of 0.


(1) Is Canada Telecom\'s WACC the right discount rate for its new project? Why or why not?
(2) Explain why you cannot use XYZ\'s equity beta (1.05) as a proxy for the equity beta of Canada Telecom\'s new project. Estimate the new project\'s equity beta.
(3) What is the new project\'s cost of capital?