You have been asked to assess a new investment project that Starbucks is considering

making in the retailing business. You have been provided with the following information:

Starbucks

Regression beta $1\mathrm{.}15$

Debt to equity ratio $25\%$

Rating and Default spread A $(1\mathrm{.}00\%)$ BB$+(2\mathrm{.}00\%)$

Retailing

regression beta $1\mathrm{.}56$

Debt to equity ratio $50\%$

Rating and Default spread BB$+(2\mathrm{.}00\%)$

Starbucks plans to fund its retailing venture using the same mix of debt and equity as it

uses for the rest of its operations currently. Cost of debt is expected to be equivalent to

current financing cost for Starbucks.

The tax rate for all firms is $40\%,$ the risk$-$free rate is $5\%$ and the market risk premium is $4\%.$

a$.$ Estimate the cost of equity for this project investment.

b$.$ Estimate the cost of capital for this project investment.