Question
Mega Books is a publishing company that is considering expanding into educational services. Solitaire Books has a levered beta of 0.80 and a debt to
Mega Books is a publishing company that is considering expanding into educational services. Solitaire Books has a levered beta of 0.80 and a debt to capital ratio (D/(D+E)) of 25%. The unlevered beta for educational service companies is 1.20 and Solitaire plans to use its existing debt ratio in funding the business. Solitaires effective tax rate is 16% but the marginal tax rate is 27%. Mega is rated A, and the default spread for A rated firms is 2%. Estimate the cost of capital you would use in doing a project analysis of the educational service investment. (You can assume that the riskfree rate is 3.5% and the market risk premium is 5.39%)
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