Question
You are working for Microsoft evaluating the possibility of selling energy drinks. This investment would be financed internally (no additional debt). Microsofts WACC is 8.3%.
You are working for Microsoft evaluating the possibility of selling energy drinks. This investment would be financed internally (no additional debt). Microsofts WACC is 8.3%. Energy drinks would be a new line of business for Microsoft, however, so the systematic risk of this business would likely differ from the systematic risk of Microsofts current business. As a result, the assets of this new business should have a different cost of capital. You decide to focus on Monster Beverage Company, a well known energy drink company. Monster's beta is 1.45, and the market risk premium is 6% with a risk free rate of 3%. Monster has no debt. What is the cost of capital Microsoft should use for assessing the entry into this business?
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