Question
Hefler Healthcare, a pharmaceutical firm, is considering investing in a new business - cosmetics. Hefler has 500 million shares outstanding trading at $ 25 per
Hefler Healthcare, a pharmaceutical firm, is considering investing in a new business - cosmetics. Hefler has 500 million shares outstanding trading at $ 25 per share; its stock has a beta of 2.50. The firm has $ 6 billion in interest bearing debt outstanding (in market and book value terms), and has operating lease commitments of $ 300 million each year for the next 5 years. The long term treasury bond rate is 4% and the market risk premium is 6%. The unlevered beta for other cosmetics firms is 1.8. If the pre-tax cost of borrowing for Hefler is 8%, estimate the cost of capital that you would use to analyze this project. (The tax rate is 40%)
a. 13.51%
b. 18.18%
c. 14.44%
d. 21.21%
# Please show work-- I got 14.44 but its incorrect.
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