You are the manager of the petroleum refining division of a large international conglomerate. You are considering investing in building your own oil rig so that you​ don’t have to negotiate with suppliers for inputs for your refineries. Your​ company’s WACC is​ 10%. You are also aware of an​ all-equity company that exclusively operates oil rigs. The oil rig​ company’s equity beta is​ 1.2, the return on Treasury Bills is​ 4%, and the market risk premium is​ 6%. Estimate your​ project’s cost of capital.   A. ​10.0%   B. 12.1%   C. ​11.2%   D. 10.8%

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter22: Mergers And Corporate Control
Section: Chapter Questions
Problem 9MC
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You are the manager of the petroleum refining division of a large international conglomerate. You are considering investing in building your own oil rig so that you​ don’t have to negotiate with suppliers for inputs for your refineries. Your​ company’s WACC is​ 10%. You are also aware of an​ all-equity company that exclusively operates oil rigs. The oil rig​ company’s equity beta is​ 1.2, the return on Treasury Bills is​ 4%, and the market risk premium is​ 6%. Estimate your​ project’s cost of capital.

 
A. ​10.0%
 
B. 12.1%
 
C. ​11.2%
 
D. 10.8%
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