You have been asked to analyze GenCorp, a corporation with food and tobacco

subsidiaries. The tobacco subsidiary is estimated to be worth $ 15 billion and the food subsidiary is estimated to have a value of $ 10 billion. The firm has a debt to equity ratio of 1.00. You are provided with the following information on comparable firms:

Business Average Beta Average D/E Ratio

Food 0.92 25%

Tobacco 1.17 50%

All firms are assumed to have a tax rate of 40%. If the current long-term bond rate is 6%, risk free rate is 4% and market risk premium is 5.5%, estimate (1) the current capital cost of GenCorp and (2) the current cost of equity of GenCorp.