Notes: market risk premium of 5.5% for T. Bond Rate, and 8.7% for the T. bill rate, and tax of 40% where none is specified.

Question 3: Sony, which is one of the most diversified large corporations in Japan, has a Beta of 1.10 and debt ratio of 30%, the after tax cost of debt is 4%. It is considering creating a subsidiary in the Middle East. The Beta of other companies in the same industry is 0.80, debt ratio of these firms is 20% and the typical cost of debt is 5.5%. If the riskless rate is 6% and the risk premium is 5.5%. Estimate the cost of capital for the subsidiary