1. Sao Paolo Foods is a Brazilian producer of breads and other baked goods. Over the…

1. Sao Paolo Foods is a Brazilian producer of breads and other
baked goods. Over the past year, profitability has been strong and
the share price has risen from R$15 per share to R$25 per share.
The company has 20 million shares outstanding. The company’s
borrowing is conservative; the company has only R$100 million in
debt. The debt trades at a yield to maturity 50 basis points above
Brazilian risk-free bonds. Sao Paolo Foods has a market beta of
0.7. If the Brazilian risk-free rate is 7 percent, the market risk
premium is 5 percent, and the marginal tax rate is 30 percent, what
is Sao Paolo’s cost of capital?