Sharp Products, Inc. seeks a potential expansion into solar heating. Sharp has hired you to help them compute estimates of the appropriate after-tax WACC for assessing new solar heating projects. Based upon the technology of Sharp's proposed expansion, you are able to find two companies engaged in similar solar heating activities. However, each company also operates a division that manufactures home generators:

Comparables	E	D/(E+D)	% Assets Solar Heating	% Assets Home Generators
Advance Energy, Inc.	1.10	20%	40%	60%
NuEnergy, Inc.	1.30	25%	60%	40%

Assume the debt betas for all companies are approximately zero, the corporate tax rate is 35% for all companies, and Sharp desires a target debt-to-value ratio of 30%. In addition, you estimate that the market risk premium (rM-rf) is 5% and the risk-free rate of interest is 1%.

1. Calculate the unlevered beta U for each comparable firm.. (Do not round intermediate results and provide numerical values to three decimal places.)

2. Use a system of two equations in two unknowns (the unlevered beta for each industry) to calculate the unlevered beta U for the solar heating and home generator industries. (Do not round intermediate results and provide numerical values to three decimal places.)

3. Estimate the after-tax weighted-average cost of capital for Sharp that is appropriate for projects in the solar heating industry. (Do not round intermediate results and provide numerical values as a % to two decimal places.)

Answer Options:

I

a: Advanced Energy: 1.050; NuEnergy: 1.050

b: Solar Heating: 0.880; Home Generators: 0.975

c: 5.40%

II

a: Advanced Energy: 0.917; NuEnergy: 1.040

b: Solar Heating: 0.917; Home Generators: 1.040

c: 6.83%

III

a: Advanced Energy: 0.880; NuEnergy: 0.975

b: Solar Heating: 1.165; Home Generators: 0.690

c: 6.72%

IV

a: Advanced Energy: 1.165; NuEnergy: 0.690

b: Solar Heating: 1.050; Home Generators: 1.050

c: 6.25%