A comparable firm (with comparable size and in a comparable business) has a Yahoo! Finance-listed equity beta of 2.5 and a debt/asset ratio of 2/3. Assume the debt is risk free.
(a) Estimate the beta for your firm if your projects have similar betas, but your firm will carry a debt/asset ratio of 1/3.
(b) If the risk-free rate is 3% and the equity premium is 2%, then what should you use as your firm's hurdle rate?
(c) What do investors demand as the expected rate of return on the comparable firm's equity and on your own equity?