Firm X has a beta of 1.3 and a debt-to-equity ratio of 0.7 .
It has deb with a coupon of 8%, face value of $1,000 and yield-to-maturity of 12%. It has chosen firm P as a proxy company for a new project it is considering in a totally different line of business from its present one. Firm P has a beta of 1.6 and debt-to-equity ratio of 0.4 and a bond with yield-to-maturity of 10%, a coupon of 12% and face value of $1,000.
Both firms are in the 40 percent marginal tax bracket. The expected return on the S&P is 13% and the rate on 90-day Treasury bill is 3%.
Find the required return on the new project that Firm X is considering. Show all formulae, steps and calculations neatly and in the proper sequence.