McDonalds Corp has hundreds of thousands of employees. Rather than paying an insurance company to insure its employees, McDonalds is thinking about starting to insure its own employees. Obviously, the risk of the insurance industry is not the same as the risk of the fastfood industry, so McDonalds is trying to come up with a cost of capital for the project. To accomplish this, McDonalds is going to use the pure plays technique. Assume no risk of bankruptcy for McDonalds or any of the pure play companies. Assume all companies have a marginal tax rate of 35%. The insurance division of McDonalds would have a debt-to-equity ratio of 0.6. The cost of debt for the new division is 4.5%, which is also the risk free rate. The debt beta is zero for all companies. The market risk premium is 5.5%. Information on pure plays is listed below. Find the WACC for the new division.

Company Equity Beta D/E Ratio

AFLAC 0.25 0.171

Aon Corp 1.48 0.438

Conseco 1.37 0.301

Unum 1.52 0.345