Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced and marketed by a separate division. the new division will have a capital structure of 70 percent debt and 30 percent equity. faris has a current beta of 1.1, but is not sure what the beta for the new division will be. amx is a firm that produces a product similar to the product under consideration by faris. amx has a beta of 1.6, a capital structure of 40 percent debt and 60 percent equity and a marginal tax rate of 40 percent. faris' tax rate is 40 percent. what will be faris' weighted cost of capital for this new division if the after-tax cost of debt is 7 percent, the risk-free rate is 8 percent, and the market risk premium is 5 percent?

a. 12.15%

b. 11.41%

c. 18.15%

d. 14.27%

11.41%

Explanation:

Unlevered beta for new division:

= Levered beta ÷ [1 + (1 - tax) × D/E]

= 1.6 ÷ [1 + (1 - 40%) × (40 ÷ 60) ]

= 1.14

Beta for Faris's new division:

= Unlevered beta × [(1 + (1 - tax) × D/E]

= 1.14 × [1 + (1 - 40%) × (70 ÷ 30)]

= 2.74

Using CAPM,

Cost of equity, re = Rf + (beta × MRP)

                             = 8% + (2.74 × 5%)

                             = 21.71%

WACC:

= (wd × rd) + (we × re )

= (70% × 7%) + (30% × 21.71% )

= 11.41%

are you looking for a specific answer?

1   all nations face the problem of scarcity because there are limited resources and unlimited wants. nations do not have enough factors of production to produce everything that their population wants. entrepreneurial resources initiate businesses to make new goods and services; labor resources produce goods and services.

2 there are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources. natural resources are raw materials from nature that are used to produce goods. trees, water, and grains are natural resources. some natural resources, such as wheat and cattle, are renewable

3 wants

things that you do not need to have in order to survive, but would like to have

needs

things that you must have in order to survive

goods

physical products

services

tasks that a business perform for customers

resources

items that people can use to make or obtain what they need or want

determine

to settle or decide by choice of alternatives or possiblities

4 i really dont know