Question

You are considering investing in the fast-food industry. By looking at data on publicly traded fast-food companies, you find the following information for Big Pappa Fast Food and Finger Licking Fast Food:

The expected return on the market Portfolio	10%
Corporate Tax	34%
Equity (levered) beta for Big Pappa Fast Food	1
Equity (levered) beta for Finger Licking Fast Food	0.8
Debt-to-equity ratio for Big Pappa Fast Food	0.25
Debt-to-equity ratio for Finger Licking Fast Food	0.15
The risk free rate	5%
The expected return on the market Portfolio	10%
Corporate Tax	34%
Equity (levered) beta for Big Pappa Fast Food	1
Equity (levered) beta for Finger Licking Fast Food	0.8
Debt-to-equity ratio for Big Pappa Fast Food	0.25
Debt-to-equity ratio for Finger Licking Fast Food	0.15
The risk free rate	5%

(i) Calculate the asset beta for both Big Pappa Fast Food and Finger Licking Fast Food.

(ii) Show how the asset beta estimated can be used to calculate the discount rate for an investment in the fast food business.

Answer 1

Taven am expec Rm Expected Retum on market Porfolio -10% t: Corporate Tax – 341 B. Equity (leverd) beta for Big Pappa Fast food P = Igung (levered) beta for Finger licking fart food P: Debt to equity ratio for Big Pappa Fart food = 0.25 p . Dehl to Equity Ratio for finger licking fant E2 foods o.is I k Risk free Rate = 5% Tofind: o Agret Beta for both Big Pappa Fast food and Finger licking fast food For Big Popra Fast food Asset Beta BOL Unlevered Beta, B: Bull (UD) I : BUL,(1 + (1-0-34)X0:25) (1+0.165) Bur: 0.858 Art Beta for Big Poppa for food 0.858.

For Finger licking Axel Beta Bula Fast Food Unlevered Beta BL - Bula (1 + (1-UP) Des 0.8 - Bulsfit (-0:34) X0:15)] Bulee jo totes Bule. 0.728 Asset Beta for Finger licking fast food-0.728. in how asset Beta estimated calculate discount rate for fast food bumar can be used to an investment in We have to find out proreet discount rate redmount rate for an investment in fast and business since we have 2 asset bete, e will her out average ossct Beta Arabu = 0.858 +0.728 0.793.

com uning Aron Peta - REA (Rm Pp) x Bus - sl. Col-st) x 0 793 51 .2.965/ -8.7654 8.965% is discount rate fast food business for inretment in
asset beta (project beta) is also known as unlivered beta. Since project have different business and financial risk than company we cannot used wacc of firm a discounting rate to discount cashflow from a project so for that we have to calculate discount rate of project using CAPM technique where we will use asset beta.