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SAIPA Corp. is a publicly-traded company that specializes in car manufacturing. The company’s debt-to-equity ratio is...

SAIPA Corp. is a publicly-traded company that specializes in car manufacturing. The company’s debt-to-equity ratio is 1/4, the cost of debt is 7%, and its equity beta is 1.5. The risk-free rate is 5%, the market risk premium is also 5%, and the corporate tax rate is 40%. Suppose SAIPA is considering the possibility of getting into speed boat manufacturing business. It plans to finance this new project equally with debt and equity. The cost of debt for the new project is 6%.

SAIPA’s CFO took FIN415 and remembers that she need to use the industry asset beta approach to compute the new project's cost of capital. She asks her associates to provide her with some financial information to calculate the industry beta. Here is some of the information she has received.

Yamaha Boat

Ford Motors

Industry

Speed boat manufacturing

Car manufacturing

D/E ratio

1

0.75

Equity Beta

1.8

1.4

Cost of Debt

5%

7%

The industry asset beta = ???

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