Question 5

You are trying to estimate the cost of equity for a privately owned railroad company called the Illinois-Pacific Railroad. You know that the company's cost of debt is 4% and its debt-to-enterprise value ratio is 30%. You have collected the following information on publicly traded railroads that are comparable. All of the comparable firms have no excess cash. You also know that the risk-free rate is 2% and the market risk premium in 5%. What is the best estimate for the cost of equity of the Illinois-Pacific Railroad? Select one.

Company	Beta	Market Capitalization (in $ billions)	Market Value of Debt (in $ billions)	Cost of Debt
UNP	1.05	133.20	24.70	3.0%
CSX	1.21	59.40	16.30	3.2%
NSC	1.38	54.70	12.20	3.1%
KSU	0.96	18.30	3.20	2.9%

	I.	8.16%
	II.	6.91%
	III.	7.75%
	IV.	9.5%