Which project should x invest in? and what will its new cost of equity be?
X is an all equity financed firm with a market value of £21m and a beta of 1.1. x is presently considering opportunities. project a and project b, both which require investment of £5m. with respect to both of these projects the returns will be received in perpetuity.abeta = 0.7expected return net of corporation tax = 16%. bbeta = 0.4expected return net of corporation tax = 11%. financing of the project will be obtained by raising new risk free debt. return on the market portfolio is given as 18% and return on the risk free security = 8%. assume that the capital market is in equilibrium. corporation tax = 35%.
