Question

My answer was 9.1 but is wrong. please help!

uestion 31 Dout of 20 points CA Canyon Buff Corp is in the cell phone industry. The management is planning to develop an electric car to be financed with only equity ABC Enterprise is a firm that specializes in this electric car X business You are given the following financial • Canyon Buff Corp has a stock price of S20 per share with 30 million shares outstanding and 400 million in market value of debt with a debt bota of 0.05 Canyon Buff has an equity beta of 13 and faces a marginal tax rate of 30% • ABC Enterprise has a stock prke of $15 per share with 30 million shares outstanding and $300 million in market value of debt with a debt beta of 0 10. ABC has an equity beta of 15 and also faces a marginal tax rate of 30% the risk tree rate is 2%, and the expected market retumis 7%, then your estimate of the cost of capital for the Canyon Buffs electric car project is Instruction Type ONLY your numerical answer in the unit of percentage sign is already there Round it to the one decimal place Eg, if your answer is 10.13%, then input 10.1. Selected Answer: 9.1

Answer 1

Since the electric project is to financed with only equity, & ABC enterprise specializes in this project business we need to find out first the unlevered Equity beta of ABC Unlevered beta= Levered beta 1 + (1-tax rate)* debt/equity Levered beta = 1.5 debt of ABC 300 million Equity 15*30 450 million Tax rate 30% unlevered beta = 1.5/(1+(1-0.3)*(300/450)) 1.02 we use the CAPM model to estimate the project cost Cost = risk free rate + Beta*(Market return-risk free rate) 2 +1.02* (7-2) 7.1%