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Pizza Express has a target capital structure of 50% debt and 50% common equity. The firm is considering a new independent project which has an IRR of 13% and which is not related to pizza or pasta. However, a proxy firm has been identified that is exclusively engaged in the new line of business. The proxy firm has a beta (BL ) of 1.2 and an equity-to-asset ratio of 60%. Both firms have a marginal tax rate of 40%, and Pizza Express's before-tax cost of debt is 12.0%. The risk-free rate is 10% and the market risk premium is 5%.

Required:

a) Based on the unlevered beta (BU) of the proxy firm, what beta (BL ) should Pizza Express use to evaluate the project?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M940757

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