l. Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have on average the following characteristics:

-Their capital structure is 10% debt and 90% common equity.

-Their cost of debt is typically 12%.

-The beta is 1.7.

Given this information, what would your estimate be for the new divisions cost of capital? Risk-free rate 5.6% Market risk premium 6.0% rs = Beta 1.7 Target Debt Ratio 10% rd 12% Tax Rate 40%

WACC = (wd rd) (1 T) + (ws rs)

WACC =( ) x 60% + 0.0%

WACC =

Division WACC 0.00%

Company WACC 0.00%