A pharmaceutical firm is considering undertaking an investment in a new tablet for moderate sore throats. This product does not belong to any of the Business lines currently developed by the company. If it is undertaken, this project would represent 40% of the total assets of the company and the majority of the investment would be destined to acquire a patent. The company is currently financed with 70% equity and 30% debt, for which the company pays a Spread of 1%. The long term risk free rate is 5%.

There exist three companies specialised in similar tablets and their data is summarized in the following table:

Firm	Leverage (D/V)	ICR	Rating
Farmacomp	30%	3,2	A-
Fimca	25%	Not available	A
Müller	35%	2,9	Not available

1. Compute the beta debt of the three comparable companies knowing that the expected market return in the long term is 11%.
2. Compute the cost of capital of the new Project knowing that the average beta of the assets of the firms Farmacomp, Fimca and Müller is 1.22 and the expected market return in the long term is 11%.

On the other hand, the finance department has collected the following information:

Rating	ICR	Spread (bp)
AAA	> 9	20
AA	7,5 – 9	40
A+	6 – 7,5	60
A	4,5 – 6	90
A-	3 – 4,5	100
BBB	2 – 3	120
BB	1,5 – 2	180
B+	0,75 – 1,5	220

Answer rating: 100% (QA)

1 2 Farmacomp Fimca Mller Formula DV 30 25 35 IR 32 Na... View the full answer