Apex is a media company that is considering expanding into streaming services. Apex has a levered beta of 0.80 and a debt to capital ratio (D/(D+E)) of 20%. The unlevered beta for streaming service companies is 1.10 and Apex plans to use its existing debt ratio in funding the business. Apex’s effective tax rate is 30% but the marginal tax rate is 40%. Apex is rated A, and the default spread for A rated firms is 2%. You can assume that the riskfree rate is 3% and the equity risk premium is 6% Estimate the cost of capital you would use in doing a project analysis of the streaming service investment

Apex is a media company that is considering expanding into streaming services. Apex has a levered beta of 0.80 and a debt to capital ratio (D/(D+E)) of 20%. The unlevered beta for streaming service companies is 1.10 and Apex plans to use its existing debt ratio in funding the business. Apex’s effective tax rate is 30% but the marginal tax rate is 40%. Apex is rated A, and the default spread for A rated firms is 2%. You can assume that the riskfree rate is 3% and the equity risk premium is 6% Estimate the cost of capital you would use in doing a project analysis of the streaming service investment

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 8E

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