Homework Answers
a) First, we will calculate cost of capital of both the divisions,
Soft drink division
Cost of Capital = Risk free rate + Beta x Market Risk Premium
Cost of Capital = 2% + 0.51 x 5% = 4.55%
Chemical division
Cost of Capital = Risk free rate + Beta x Market Risk Premium
Cost of Capital = 2% + 1.13 x 5% = 7.65%
Value of Soft Drink division = Free cash Flow / (cost of capital - growth rate)
Value of Soft Drink division = $77 million /(4.55% - 3%) = $4,967.74 million
Value of Chemical division = Free cash Flow / (cost of capital - growth rate)
Value of Chemical division = $63 million /(7.65% - 2%) = $1,115.04 million
b)
Total value of firm = (4,967.74 + 1,115.04) Million
Total value of firm = $6,082.78 million
Current equity beta = Beta soft x Value Soft/Total value + Beta Chemical x Value Chemical/ Total Value
Weston's Current equity beta = 0.51 x $4,967.74/$6,082.78 + 1.13 x $1,115.04/$6,082.78
Weston's Current equity beta = 0.416 + 0.207 = 0.62 (approx)
c)Weston's cost of Capital
Cost of Capital = Risk free rate + Beta x Market Risk Premium
Weston's Cost of Capital = 2% + .62 x 5% = 5.12%(approx)
Its not useful because individual divisions are either less risky or more risky. The company's equity beta will decline towards 0.51 as the soft drink division has a higher growth rate and will be representing a larger fraction of the firm.
An upvote would be appreciated.
Add Answer to:
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset...
Westfield has two divisions beta of .50, expects to generate f ree cash flow of $40 million this coming year, and antic...
Westfield has two divisions beta of .50, expects to generate f ree cash flow of $40 million this coming year, and anticipates a long-run growth rate of 1.5%. The toy division has an asset beta of .80, expects to generate free cash flow of $50 million this coming year, and expects a long-run growth rate of 2%. and the expected return on the market portfolio is 10%. the value of each division The food division has an asset The risk-free...
Please solve, thanks. Your company has two divisions: One division sells software and the other division...
Please solve, thanks.
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.8%, its market value of equity is $66.7 billion, and it has $705 million worth...
Please Answer A-B Your company has two divisions: One division sells software and the other division...
Please Answer A-B
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.21, the risk-free rate is 4.7%, its market value of equity is $66.9 billion, and it has $690 million worth...
Your company has two divisions: One division sells software and the other division sells computers through...
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.9%, its market value of equity is $65.3 billion, and it has $703 million worth of debt with...
Problem 13-21 : Question Help Your company has two divisions: One division sells software and the...
Problem 13-21 : Question Help Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.22, the risk-free rate is 4.5%, its market value of equity is $66.1 billion, and it has $690...
Wizard Co. currently has only a real estate division and uses only equity capital; however, it...
Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.3. The risk-free rate is 4.4%, and the market-risk premium is 6.2%. @ 8.80% 4.40% 10.12% 12.46% This means that the firm's real estate division will have a cost of capital of: The consulting division is expected to have a beta of 2.2, because it will be riskier than the firm's real estate...
1. Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division...
1. Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division B has a beta of 1.2. The company is 100% equity financed. The risk-free rate is 6% and the market risk premium is 5%. Sunshine assigns different hurdle rates to each division based on each division's market risk. Which of the following statements is CORRECT? Sunshine's composite WACC is 10%. b. Division B has a lower WACC than Division A. C. If the same...
You were appointed the CFO of a firm with 2 divisions: Div. 1 -- produces regular telephones Div. 2 -- produces specialty micro-chips which are used in cell phones Given Information: Market value of y...
You were appointed the CFO of a firm with 2 divisions: Div. 1 -- produces regular telephones Div. 2 -- produces specialty micro-chips which are used in cell phones Given Information: Market value of your firm’s debt = $100 million Market value of your firm’s equity = $100 million Overall/total value of firm = $200 million. Beta of firms’ equity = 2 Firm’s debt = riskless. Expected excess return on the market over the riskless rate = 8% percent Risk-free...
The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is...
The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 4.67% while the market risk premium is 6.63%. The Jefferson Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Jefferson's cost of equity is 11.3085% The cost of equity using the bond yield plus risk premium approad 10.779 11.847% The Harrison Company is dosely held and, therefore, cannot generate relis cost of internal equity. Harrison's bonds yield 11.52%, and...
Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is...
Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is considering creating marketing and retail divisions. Its beta is currently 1.1. The marketing division is expected to have a beta of 1.9, because it will have more risk than the firm's wholesale division. The retail division is expected to have a beta of 0.8, because it will have less risk than the firm's wholesale division. The risk-free rate is 4.8%, and the market-risk premium...
Westfield has two divisions beta of .50, expects to generate f ree cash flow of $40 million this coming year, and anticipates a long-run growth rate of 1.5%. The toy division has an asset beta of .80, expects to generate free cash flow of $50 million this coming year, and expects a long-run growth rate of 2%. and the expected return on the market portfolio is 10%. the value of each division The food division has an asset The risk-free...
Please solve, thanks.
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.8%, its market value of equity is $66.7 billion, and it has $705 million worth...
Please Answer A-B
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.21, the risk-free rate is 4.7%, its market value of equity is $66.9 billion, and it has $690 million worth...
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.9%, its market value of equity is $65.3 billion, and it has $703 million worth of debt with...
Problem 13-21 : Question Help Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.22, the risk-free rate is 4.5%, its market value of equity is $66.1 billion, and it has $690...
Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.3. The risk-free rate is 4.4%, and the market-risk premium is 6.2%. @ 8.80% 4.40% 10.12% 12.46% This means that the firm's real estate division will have a cost of capital of: The consulting division is expected to have a beta of 2.2, because it will be riskier than the firm's real estate...
1. Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division B has a beta of 1.2. The company is 100% equity financed. The risk-free rate is 6% and the market risk premium is 5%. Sunshine assigns different hurdle rates to each division based on each division's market risk. Which of the following statements is CORRECT? Sunshine's composite WACC is 10%. b. Division B has a lower WACC than Division A. C. If the same...
The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 4.67% while the market risk premium is 6.63%. The Jefferson Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Jefferson's cost of equity is 11.3085% The cost of equity using the bond yield plus risk premium approad 10.779 11.847% The Harrison Company is dosely held and, therefore, cannot generate relis cost of internal equity. Harrison's bonds yield 11.52%, and...
Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is considering creating marketing and retail divisions. Its beta is currently 1.1. The marketing division is expected to have a beta of 1.9, because it will have more risk than the firm's wholesale division. The retail division is expected to have a beta of 0.8, because it will have less risk than the firm's wholesale division. The risk-free rate is 4.8%, and the market-risk premium...
Most questions answered within 3 hours.
-
6. The Bill of Rights (first 10 Amendments to the US
Constitution) consists of several limitations...
asked 45 seconds ago -
1)a. Using the Born Haber cycle, determine the enthalpy for
lattice formation of MgO.
Mg (s),...
asked 4 minutes ago -
What are the ethical issue of using robotics in surgery ? List
the issues based on...
asked 19 minutes ago -
URGENT
1. A person standing a certain distance from nine identical
loudspeakers is hearing a sound...
asked 21 minutes ago -
If X1 ∼ χ21 and
X2 ∼ χ21 , then? show your
work.
(a) X1 + X2...
asked 50 minutes ago -
a fair red die and a fair blue die are rolled. What is the
expected value...
asked 1 hour ago -
How many unpaired electrons would you expect for the complex ion
[FeF6]4-?
0
2
6
3...
asked 1 hour ago -
please briefly explain your idea about the following
paragraph.
Genetic engineering is a process of modifying...
asked 1 hour ago -
When a piece of wood is pressed against a spring and compresses
the spring by 2.00...
asked 1 hour ago -
Organizations that interact with medical patients are subject to
HIPAA compliance.
a. Briefly describe, in your...
asked 3 hours ago -
1. A sociologist examines the relationship between the poverty
rate and several socioeconomic factors. For the...
asked 4 hours ago -
Discuss how strategic digital marketing is a much wider
topic than social media marketing.
Describe 1-2...
asked 7 hours ago