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What is estimated cost of equity capital for juniors

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Question

Juniors Manufacturing Company's current capital structure is comprised of 30% debt and 70% equity (based on market values). Juniors' equity beta (based on its current level of debt financing) is 1.2, and its debt beta is 0.2. Also, the risk-free rate of interest is currently 4.8% on long-term government bonds. Market risk premium is 5%.

1. What is the estimated cost of equity capital for Juniors (using CAPM)? If Juniors' marginal tax rate is 30%, what is the firm's overall weighted average cost of capital (WACC)?

2. Juniors is considering investing in a new technology. The firm's investment banker estimates that Juniors will be able to borrow up to 45% of the needed funds and maintain its current credit rating and borrowing cost. Estimate the WACC for this project.

Reference no: EM133566661

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