A pharmaceutical firm is considering undertaking an investment in a new tablet for moderate sore throats. This product does not belong to any of the Business lines currently developed by the company. If it is undertaken, this project would represent 40% of the total assets of the company and the majority of the investment would be destined to acquire a patent. The company is currently financed with 70% equity and 30% debt, for which the company pays a Spread of 1%. The long-term risk-free rate is 5%.

There exist three companies specialised in similar tablets and their data is summarized in the following table:

Firm Leverage (D/V) ICR Rating

Farmacomp 30% 3,2 A

Fimca 25% Not available A

Mller 35% 2,9 Not available

On the other hand, the finance department has collected the following information:

Rating ICR Spread (bp)

AAA > 9 20

AA 7,5 9 40

A+ 6 7,5 60

A 4,5 6 90

A- 3 4,5 100

BBB 2 3 120

BB 1,5 2 180

B+ 0,75 1,5 220

a) Compute the beta debt of the three comparable companies knowing that the expected market return in the long term is 11%.

b) Compute the cost of capital of the new Project knowing that the average beta of the assets of the firms Farmacomp, Fimca and Mller is 1.22 and the expected market return in the long term is 11%.