JB Multinational is a vast conglomerate firm involved in a wide array of business ventures ranging from

manufacturing to transportation. One of its many divisions, a furniture chain, is considering the value in

trying to push its brand into a new geographical market and thus needs to estimate the appropriate cost

of capital for this project. To help in your analysis, your assistants collected some data:

JB has $$9$ billion in debt outstanding, a market capitalization of $$30$ billion, and its average tax rate is

$32\%.$ New bonds would have to be issued with a $6\%$ coupon rate while there is sufficient retained

earnings to pay for the expansion $($internal equity will be allocated such that the capital structure will

not change$).$

The closest market competitor for the furniture chain, LIKEA, has a beta of $2\mathrm{.}1$ with the broad market.

Its most recent bond sale $($still trading very close to par$)$ offered a $7\mathrm{.}6\%$ coupon rate and it also faces a

$32\%$ tax rate. Their D$/$E ratio is $0\mathrm{.}6.$ The risk$-$free rate is estimated to be an average of $3\mathrm{.}1\%$ for the

appropriate time horizon and the market risk premium is estimated to be $7\%$ over the coming years.

What cost of capital should be applied to JB$\text{'}$s furniture chain expansion plan?