JKL Corporation,a Company Devoted Primarily to Paper Products,is Estimating the Cost

Multiple Choice

JKL Corporation,a company devoted primarily to paper products,is estimating the cost of equity appropriate for a vegetable processing plant it is planning to build.JKL Corp.has an equity beta of 1.0 and a debt ratio (D/(D+E) ) of 0.3.A comparable (vegetable processing) firm has an equity beta of 0.8 and a debt ratio of 0.2.Assume a risk-free rate of 5% and a market risk premium of 8%.What cost of equity should JKL use in this situation?

A) 7.7%
B) 11.4%
C) 12.3%
D) 13.0%