You're analyzing a project that is similar to SaxaCo, a pure play in the widget production industry.
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Question:
You're analyzing a project that is similar to SaxaCo, a "pure play" in the widget production industry. So, you want to use SaxaCo's return on assets (i.e., unlevered cost of capital) as a proxy for the return investors would require on your project is. The problem is, SaxaCo has debt in its capital structure. SaxaCo has a debt-equity ratio of 0.87. The current beta on SaxaCo's common stock is 1.16. The risk-free rate is assumed to be 2.9% and the market risk premium is assumed to be 6.66%. SaxaCo has a pretax cost of debt of 6.61% and pays an effective tax rate of 35%.
What is SaxaCo's unlevered cost of capital?
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi
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