The Folske Fan Corporation has four divisions:
The (leveraged) beta for Folske has been estimated to be 1.25. The company believes that the (leveraged) beta for consumer products is 1.2; for consulting, 1.3; and for financial services, 1.5. The appropriate capital structure for the industrial products division is 70 percent equity and 30 percent debt (and all projects in that division are currently financed in those proportions). The firm's consolidated capital structure consists of 60 percent equity and 40 percent debt. The risk-free rate is 9 percent, and the market risk premium is 8.6 percent. Folske's marginal tax rate is 40 percent.
What is the minimum rate of return that Folske should demand on the equity-financed portion of investments in its industrial products division, assuming these investments continue to be financed with 70 percent equity and 30 percent debt?