Question: Your employer is planning a food processing plant code named VEGA01 and asked you to estimate the cost of equity capital for this project. You

  1. Your employer is planning a food processing plant code named VEGA01 and asked you to estimate the cost of equity capital for this project. You found Delicious Food Corporation (DFC), a firm that matches the business risk of your project. From market data you estimate DFCs required return on equity to be 18%, the risk free rate to be 4%, and the expected return on the TSX (the market) is 12%. From DFCs financial statements, you discover that it has a debt to total asset ratio of 0.5. However, your plan is to use debt to finance VEGA01 to the point that the debt to total asset ratio will be 0.65. What should be your estimate of the cost of equity capital for VEGA01? (7 marks)

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