Exam 12: Risk, Cost of Capital, and Valuation

An all-equity firm has a beta of 1.03.The firm is evaluating a project that will increase the output of the firm's existing products.The market risk premium is 6.9 percent,and the risk-free rate is 3.4 percent.What discount rate should be assigned to this expansion project?

Green Roof Foods currently has a debt-to-equity ratio of 0.53,its cost of equity is 14.2 percent,and its pretax cost of debt is 6.8 percent.The tax rate is 35 percent,and the risk-free rate is 3.1 percent.The firm's preferred capital structure consists of 35 percent debt.What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with equity?