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1) You are advising a phone company that is planning to invest in projects in multimedia. The beta for the telephone company is 0.75 and
1) You are advising a phone company that is planning to invest in projects in multimedia. The beta for the telephone company is 0.75 and has a debt/equity ratio of 1.00; the after tax cost of borrowing is 4.25%.The multimedia business is considered to be much riskier than the phone business; the average beta for comparable firms is 1.30 and the average debtfeqnity ratio is 50%. Assuming that the tax rate is 40%: (The riskless rate is 7%) a) Estimate the unlevered beta of being in the multimedia business. b) Estimate the beta and cost of equity if the phone company finances its multimedia projects with the same debtfequity ratio as the rest of its business c) Assume that a multimedia division is created to develop these projects , with a debt equity ratio of 40%. Estimate the beta and cost of equity for the projects with this arrangement
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