Exam 23: Techniques for Measuring Beta Risk

.Interstate Transport has a target capital structure of 50% debt and 50% common equity.The firm is considering a new independent project that has a return of 14% and is not related to transportation.However,a pure-play proxy firm has been identified that has a beta of 1.38.Both firms have a marginal tax rate of 25%,and Interstate's before-tax cost of debt is 12%.The risk-free rate is 10% and the market risk premium is 5%.The firm should:

Which of the following methods involves calculating an average beta for comparable firms and using that beta to determine a project's beta?

Northern Conglomerate has two divisions,Division A and Division B.Northern looks at competing pure-play firms to estimate the betas of each of the two divisions.After this analysis,Northern concludes that Division A has a beta of 0.8 and Division B has a beta of 1.6.The two divisions are the same size.The risk-free rate is 5.00% and the market risk premium is 7.00%.Assume that Northern is 100% equity financed.What is the overall composite WACC for Northern Conglomerate? Do not round your intermediate calculations.