11. An engineering company wants to diversify into construction business. The new business will be organized. as...
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11. An engineering company wants to diversify into construction business. The new business will be organized. as a division. The company found a comparable construction company of roughly the same characteristics as the proposed division. It has equity beta of 1.65, and debt ratio of 0.80. The corporate tax rate is 30 per cent. The engineering company will have a target debt ratio of 0.50 for proposed business. The risk free rate is 7.8 per cent and the risk premium is 10 per cent. Calculate the cost of equity for the proposed new division.
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