Past data show that Janas corporate weighted average cost of capital (WACC) is 10.38%. Jana is interested in establishing a new division that will focus primarily on developing new Internet-based projects. Jana hires you as part of her team of project managers. 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 The firm's tax rate is 25% The yield on T-bonds is 5.6%, and The market risk premium is estimated to be 6%. The team of project managers has estimated that typical projects within this new division would fetch an expected return of 16% or more.

1. You are a) to estimate the divisions cost of capital and b) to decide if the projected new division should be implemented or not. Hint: based on the given data, a) compute the expected return of equity and b) the WACC for the new division. Compare with the typical projects expected return and comment your results.

2. What are three types of project risk? How can each type of risk be considered when thinking about the new divisions cost of capital?