Ignore taxes (i.e., assume the corporate tax rate is 0%) and assume the CAPM holds. Apple is thinking of getting into the electric power generation business. The average electric power company has a capital structure that is 40% debt and 60% equity, with a debt beta of 0.1 and an equity beta of 0.8.

a. What is the asset beta of the electric power generation business? b. Assume Apple will finance its electric power generation business with 20% risk-free debt and 80% equity. i. What will the equity beta of this business be?

ii. Assuming a risk-free rate of 2% and an equity risk premium of 4%, what will be the cost of this equity (1 point) and the WACC of Apples power generation business ?

c. Apples investment banker tells them they are crazy. Instead of financing the business 80/20 (equity/debt), he advises a financing mix of 70% debt, 30% equity. Under this financing, the debt will be riskier, with a beta of 0.2. Under these new assumptions

1. What is Apples cost of debt for electric power generation? (Use the risk-free rate and market risk premium from part c to calculate the cost of debt.)

2. What is Apples equity beta and cost of equity for electric power generation? (Use the risk-free rate and market risk premium from part c.)

3. Finally, what is Apples WACC for electric power generation?