Question 16

1. Suppose your firm has a cost of debt of 7% and a debt to equity ratio of 1:1. Your firms Beta is 1.8, the current 5-year Treasury Yield is 3%, and you estimate that the equity risk premium is 6%. You are considering a five-year project that has the following cashflows and default probabilities:

   Year	0	1	2	3	4	5
   CF	-200	0	40	60	90	300
   Pr(Default)	0	0	0.3	0.3	0.3	0.3

   What is the weighted average cost of capital for the firm? (Report your answer as a percent (i.e. 4% = 4).