You have recently been hired by Bio Lux Company, in its relatively new treasury management department. Bio Lux was founded five years ago by Jessica Parker. Jessica found a method to produce high quality shampoo using natural ingredients. The shampoo produced by Bio Lux is in a good position to compete with other more established shampoo producers. The company is privately owned by Jessica Parker and her family, and it had sales of $12 million last year.

Bio Lux primarily sells its products through a wholesaler who distributes the products through its network of retailers throughout the country. Bio Luxs growth to date has come from its innovation, quality, and low costs. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Jessica has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Jessica would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Jessica wants you to use a similar company to estimate the cost of capital (WACC) for Bio Lux, and she has chosen Procter & Gamble as a representative company. The following questions will lead you through the steps to calculate this estimate.

Go to Nasdaq.com and find the list of competitors in the industry. You can do this by clicking on the search window, then enter PG (which is the ticker of Procter & Gamble). The list of competitors of the company will be available when you click on Competitors in the left vertical menu. Use U.S.-based competing companies for this task.

1. a) Find the beta for each of these competitors, and then calculate the industry average beta.
2. b) Using the industry average beta, what is the cost of equity?
3. c) Does it matter if you use the beta for Procter & Gamble or the beta for the industry in this case?