Genentech Inc. currently has a capital structure of 70 percent debt and 30 percent equity,...
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Genentech Inc. currently has a capital structure of 70 percent debt and 30 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 55 percent debt and 45 percent equity. Genentech has a current beta of 3.2, but is not sure what the beta for the new division will be. Celgene Corporation is a firm that produces a product similar to the product under consideration by Genentech. Celgene has a beta of 2.4, a capital structure of 40 percent debt and 60 percent equity and a marginal tax rate of 40 percent. Genentech's tax rate is 30 percent. What will be Genentech's weighted cost of capital for this new division if the after-tax cost of debt is 10 percent, the risk-free rate is 6 percent, and the market risk premium is 12 percent?
a) 25.38% b) 16.79% c) 23.73% d) 11.40%
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