Mate and Ricks (MR), LTD., a company that specializes in virtual reality games, is thinking of investing in a new line of business (they want to start producing black leather pants), but is trying to figure out what its hurdle rate for that division should be. The feeling in the company is that the assets used in this new line of business should be useful and adequate for anywhere from 9 to 12 years, after which time the company may reassess their position in this industry. The company (MR) currently has 100,000 shares outstanding, trading at $10 each. Also, MR has a bond issue outstanding with a face value of $500,000 and a 10% annual coupon and which is trading at par. The new division is expected to have the same target capital structure as the parent company. However, the cost of equity capital for the new line of business is unknown. You also have the following competitors data available (these competitors are publicly traded). These firms operate in the same industry as MRs new proposed line of business:

company	# of shares	Price per share	book value of debt	yield on debt	beta (of equity)
ghostly danger	200,000	$5.00	$100,000	12%	2.0
Eleventh level	10,000	$25.00	$500,000	9%	2.7

Company Number of shares Price per share Book value of debt Yield on debt Beta (of equity)

Suppose you also have the following information concerning current interest rates (government bond rates):

3 month	6 month	1 yr	5 yr	10 yr	30 yr
6%	6.5%	6.75%	7.75%	8.00%	8.25%

Additionally, you estimate that the historic market risk premium is about 8.5%.

1. Calculate the ratio of debt to equity for the company (MR). Also calculate the ratio of debt to total capitalization for MR.

2. Calculate an estimate of the required return to equity for the company.

3. Calculate the cost of capital for MR. Assume that the tax rate is 35%