Homework Answers
a. Beta of the equity for the firm = weighted average of the beta in the firm where the weights are market value of various departments
Total market value of the firm -= 200 + 250 + 350 = 800 million
Beta of the firm = 200/ 800 * 2.2 + 250 /800 *1.7 + 350/ 800 *1.2 = 1.61
b.
Cost of equity for R& D department as per the CAPM = Risk free rate + equity risk premium * beta
= 6 + 6.5* 2.2 = 20.30%
c. Cost of equity for the firm = 6 + 6.5 * 1.61 = 16.47%
d. Market value of the firm = FCFF 0 * ( 1 + growth rate) / ( required rate of return - growth rate)
= 9.4 * 1.08 / ( 0.1647 - 0.08 ) = 119.86 million
Market value of R& D department = 5.10 *1.08 / ( 0.2030 - 0.08) = 44.78 million
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