Use the following information for the next 3 questions. You are a commercial cleaning firm that is considering an investment in a new project in the biotech industry. Youve identified a pure-play firm in the biotech industry with a beta of 2.5 and a Debt to Equity ratio of 2.25. Your firm has a D/E ratio of 3.50 The marginal tax rates for the firms are both 20%.

1. What is the unlevered beta for the comparable firm?

2. Assuming a 4% interest on treasuries and a 6% market risk premium, what should you use for the cost of equity for the firm you are considering buying?

3. What is the beta for your firm using the Blume adjustment? (note this is in the text, and is also called the adjusted beta)