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EpiscoWhat EpiscoWhat
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4 years ago
Your firm is planning to invest in a new electrostatic power generation system.  Electrostat Inc is a firm that specializes in this business.  Electrostat has a stock price of $25 per share with 16 million shares outstanding.  Electrostat's equity beta is 1.18.  It also has $220 million in debt outstanding with a debt beta of 0.08.  If the risk-free rate is 3%, and the market risk premium is 6%, then your estimate of your cost of capital for electrostatic power generators is closest to:
A) 7.50%
B) 7.75%
C) 9.50%
D) 10.10%
Textbook 

Corporate Finance: The Core


Edition: 4th
Authors:
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anicidanicid
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4 years ago
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B
Explanation:  D) βU =  βE +  βD =   × 1.18 +   × 0.08 = 0.789677
ri = rrf + β(rm - rrf) = .03 + .789677(.06) = .07738 or 7.74%

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