Question: Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of

Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have on average the following characteristics:

• Their capital structure is 10%debt and 90%common equity.

• Their cost of debt is typically 12%.

• The beta is 1.7.

Given this information, what would your estimate be for the division’s cost of capital?

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