Company ABC is an international conglomerate. It is looking to establish a subsidiary selling unproven homeopathic remedies, having identified a current demand in the market. But, ABC needs to find the cost of equity for the subsidiary. ABC decides that Blackmores is a good comparable firm. After doing some research, ABC finds that blackmore's beta is approximately 0.27. Blackmore's debt/equity ratio is approximately 0.8. But, you believe the subsidiary can only support a debt/equity ratio of 0.5. Suppose that the corporate tax rate for blackmores is 30%, but you think it would only be 20% for the subsidiary due to its low income. The anticipated risk free rate is 2.5% and the anticipated market risk premium is 5.5%. 

What is the subsidiary's cost of equity?

Answer rating: 100% (QA)

To calculate the subsidiarys cost of equity we can use the Capital Asset Pricing Model CAPM The CAPM ... View the full answer