14 XYZ Inc., a producer of plastic cups has cost of equity rE = 15% and cost of

Question

14 XYZ Inc., a producer of plastic cups has cost of equity rE = 15% and cost of debt rD = 3%; its capital consists of equity E=$100 and debt D=$50. It is investing in a project to produce printing paper, a new line of business for the company. MSI is a printing paper company and it has costs of equity and debt, as follows: rE = 12% and rD = 4%. MSI has the same capital structure as XYZ Inc. What unlevered cost of capital should XYZ Inc use for this project? (Assume that the marginal corporate income tax rate = 40%) (a) 11.00 % (b) 9.33 % (c) 8.8 % (d) 10.6 % (e) None of the above

Explanation / Answer

d) 10.6 %

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