Question: ABC Inc is evaluating a project. The ABC intends to use 20% debt in funding the project. ABC identifies 5 comparable companies with the following
ABC Inc is evaluating a project. The ABC intends to use 20% debt in funding the project. ABC identifies 5 comparable companies with the following "equity betas" and "debt/equity" ratios. While the comparable companies have varying marginal tax rates, ABC's marginal tax rate is 25%.
The current risk free rate prevailing in the market is 3% and the market return is estimated to be about 8.5%.
Company A : 1.38 Equity Beta, 0.25 D/E, 25% Marginal Tax Rate
Company B: 1.65 Equity Beta, 0.55 D/E, 30% Marginal Tax Rate
Company C: 2.11 Equity Beta, 0.75 D/E, 35% Marginal Tax Rate
Company D: 1.54 Equity Beta, 0.50 D/E, 30% Marginal Tax Rate
Company E: 1.83 Equity Beta, 0.60 D/E, 30% Marginal Tax Rate
What is ABC cost of capital?
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