Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:
A) 5.25%
B) 6.00%
C) 6.75%
D) 7.50%
Answer: D) ri= rrf+ß(rm- rrf) = .03 + .75(.06) = .075 or 7.5%