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Decker's is a chain of furniture retail stores. Furniture Fashions is a furniture maker and a...

Decker's is a chain of furniture retail stores. Furniture Fashions is a furniture maker and a supplier to Decker's. Decker's has a beta of 1.41 as compared to Furniture Fashion's beta of 1.15. Decker’s has a cost of equity of 14.75 percent. The risk-free rate of return is 3.4 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

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Answer #1
Market risk premium (Rp) (Rs-Rf)÷β
Here,
Risk free rate of return (Rf) 3.40%
Beta of the stock (β)                                   1.41
Stock expected return (r) 14.75%
Market risk premium (Rp) 8.05%
(14.75%-3.40%)÷1.41

Deckers discount rate Here Risk free rate of return (Rf) Beta of the stock (B) Market risk premium (Rp) 3.40% 1.15 8.1% Deckers discount rate 12.66% 3.4%+1.15x8.05%

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