Problem #2

Assume that a conglomerate wishes to consider establishing a new division. Those companies within industry in which the proposed division will be part, reflect an average 'beta' of 1.20 and a Market Value based Debt/Asset ratio 0.40. The conglomerate is anticipating a Market Value based Debt/Asset ratio for their new division of 0.67. With a prevailing risk-free rate of 6%, an historic excess market return of 7.50%, and a corporate tax of 21%, calculate the weighted after-tax cost of capital for the division, given Kd = 12%.