The cost of equity for the parent company is 9.3 and the yield to maturity on the
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Question:
The cost of equity for the parent company is 9.3 and the yield to maturity on the parent's debt is 1.9. The parent company can sustain a debt to equity ratio of 0.1. The company is looking to establish a subsidiary in Australia. The pure play beta for the subsidiary is 1.08, the risk free rate is deemed to be 2.5% over the long run, and the market risk premium is deemed to be 5.5% on average. The debt yield on other similar Australian firms is approximately 6%. The relevant corporate tax rates in the parent's country and in Australia are 15%, and 20%, respectively. The subsidiary can only support a debt to equity ratio of 0.3. What is the relevant weighted average cost of capital for the subsidiary?
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