Your company operates a steel plant. On average, revenues from the plant are $30 million per

year. All of the plants costs are variable costs and are consistently 80% of revenues, including

energy costs associated with powering the plant, which represent one quarter of the plant's costs,

or an average of $6 million per year. Suppose the plant has an asset beta of 1.25, the riskfree rate

is 4%, and the market risk premium is 5%. The tax rate is 40%, and there are no other costs.

a. Estimate the value of the plant today assuming no growth.

b. Suppose you enter a long-term contract which will supply all of the plant's energy needs for

a fixed cost of $3 million per year (before tax). What is the value of the plant if you take this

contract?

c. How would taking the contract in (b) change the plant's cost of capital? Explain.

I would like to know how to get the cost of capital for B. What is the formula used to find cost of capital for B after we find the Energy cost after tax.