McDonald's Corp has hundreds of thousands of employees. Rather than paying an insurance company to insure its employees, McDonald's is thinking about starting to insure its own employees. Obviously, the risk of the insurance industry is not the same as the risk of the fast-food industry, so McDonald's is trying to come up with a cost of capital for the project. To accomplish this, McDonald's is going to use the "pure plays" technique. Assume no risk of bankruptcy for McDonald's or any of the pure play companies. Assume all companies have a marginal tax rate of 35%. The insurance division of McDonald's would have a debt-to-equity ratio of 0.6. The cost of debt for the new division is 4.5%, which is also the risk free rate. The debt beta is zero for all companies. The market risk premium is 5.5%. Information on pure plays is listed below. Find the WACC for McDonald's new division.

 

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Company AFLAC Aon Corp Conseco Corp Unum Group Equity Beta 0.25 1.48 1.37 1.52 D/E Ratio 0.171 0.438 0.301 0.345 Company AFLAC Aon Corp Conseco Corp Unum Group Equity Beta 0.25 1.48 1.37 1.52 D/E Ratio 0.171 0.438 0.301 0.345

Answer rating: 100% (QA)

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