Compute the cost of capital for the Hughes acquisition, assuming no taxes.
In 1989, General Motors (GM) was evaluating the acquisition of Hughes Aircraft Corporation. Recognizing that the appropriate discount rate for the projected cash flows of Hughes was different than its own cost of capital, GM assumed that Hughes had approximately the same risk as Lockheed or Northrop, which had low-risk defense contracts and products that were similar to Hughes. Specifically, assume the following inputs:
