5. Intel is exploring a joint venture with Ford to develop computer chips to use in automobile. Althought Intelhas traditionally used a cost of equity based on its beta of 1.50 and a cost of capital based on its debt ratio of5%, it is examining whether it should use a different approach for this project. It has collected the followinginformation. • The average beta for automobile component firms is 0.90, and the average debt/equity ratioacross these firms is 40%. . The joint venture will be financed 70% with equity from Ford and Intel, and 30%with new debt raised at a market interest rate of 7.5% a. Estimate the beta that Intel should use for this project.b. Estimate the cost of capital that Intel should use for this project. c. What wuold be the consequences of Intelusing its current cost of equity and capital on this project?

According to the illustration, Intel's cost of capital is estimated using a debt ratio of 5% and a…

Answered: 5. Intel is exploring a joint venture…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 3MC

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