Problem:
A toy company is considering developing and distributing a new board game for children. The project is similar in risk to the firms current operations. The firm maintains a debt equity ratio of 0.40 and retains all profits to fund the firms rapid growth. How should the firm determine its cost of equity?
a. by adding the market risk premium to the after tax cost of debt.
b. by multiplying the market risk premium by (1-0.40)
c. by using the dividend growth model
d. by using the capital asset pricing model.
e. by averaging the costs based on the dividend growth model and the capital asset priding model