Question

Sloan is acquiring a manufacturing system from Park Inc and considering to makes its own division. Sloan has found that Park's equity beta is 1.3, ratio of equity to debt is 1.5; and given Park's debt beta, the before tax interest rate on parks, Inc's debt is 7%. Sloan will finance this division with a debt/asset of 30%. The interest rate on debt financing for this division is 6%. Sloan tax rate = 6%. Sloan's tax rate = 36%. The risk-free rate = 4% and the market premium (ie, Rm-Rf)-8%. What is this new division's 1. debt beta 2. assets beta 3. cost of equity 4. weighted average cost of capital

Answer 1

1.
=(6%-4%)/8%=0.25

2.
=1.3/(1+(1-36%)*1/1.5)=0.911214953

3.
=4%+8%*0.911214953*(1+(1-36%)*30%/70%)=13.2892%

4.
=30%*6%*(1-36%)+70%*13.2892%=10.4544%