Zane Natural, a beverage company, is considering expanding into the snack business and you have collected the following information on the investment:

The regression beta for Zane Natural is 1.15; the unlevered beta of firms in the snack business is 0.80.

The equity in Zane Natural has a book value of $ 500 million but the market value of equity is $ 2 billion.

The firm has $ 300 million (in both book and market value terms) in interestbearing debt and lease commitments of $ 50 million every year for the next 5 years.

Zane Natural has an A rating and the default spread for A rated bonds is 1% over the riskfree rate.

The riskfree rate is 4% and the equity risk premium is 5%.

The effective tax is 30% and the marginal tax rate is 40%

a. Assuming that this project will be funded using the same mix of debt and equity as the company, estimate the cost of equity for the 'snack food" project.

b. Estimate the cost of capital for this "snack food" project

a. a) 10.22%; b) 14.65%

b. a) 3.62%; b) 4.47%

c. a) 8.62%; b) 7.47%

d. a) 9.36%; b) 6.23%