ABC Inc. is a company which sells air tickets. Its line of business is generally considered quite stable and low risk. ABC Inc. is considering expanding into the tourism business. Tourism is generally considered riskier business than selling air tickets. Currently, ABC Inc. has a cost of debt (before tax) of 4%. Its stock has a beta of 0.4. The firm's debt-equity ratio is 0.9. The firm has identified another company whose main business is tourism. This other firm also has a cost of debt (before tax) of 4%, but its beta is 2.5 and it has a debtequity ratio of 0.4. The tax rate is 35%. The expected return on the market is 10% and the risk free rate of interest is 4%. What is the appropriate cost of capital to apply to ABC Inc.'s proposed expansion into the tourism business?

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To calculate the appropriate cost of capital to apply to ABC Incs proposed expansion into the touris... View the full answer