ZuoTi.Pro
Question

You’ve identified a comparable firm for a new division you are heading up. The comparable has...

You’ve identified a comparable firm for a new division you are heading up. The comparable has an equity beta of 1.6 and its debt is risk-free. The firm has equity with a market value of $30B, $6B in debt, and $10B in excess cash. The market risk premium is 5% and the risk-free rate is 2.5%. What is the appropriate discount rate to use for your division’s assets/projects?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Please note : In above calculation, Cost of equity is calculated with CAPM equation i.e Cost of equity = risk free rate + beta*market risk premium.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

0 0
Add a comment
Know the answer?
Add Answer to:
You’ve identified a comparable firm for a new division you are heading up. The comparable has...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Albright Properties Inc. (API) has three divisions: Division Beta Proportion of Firm’s Assets Property management 1.0...

    Albright Properties Inc. (API) has three divisions: Division Beta Proportion of Firm’s Assets Property management 1.0 30% Land resources 1.5 40 Financial services — 30 The leveraged beta for API is 1.1. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Services Division’s capital structure is 80 percent debt and 20 percent equity. API is planning to finance new projects in that division with a capital structure of 90 percent debt and...

  • A company is going to open a new division. The division will be financed with $1 million in debt ...

    A company is going to open a new division. The division will be financed with $1 million in debt and $3 million in equity. The tax rate is 15% for all firms. The risk-free rate is 1% and market portfolio return is 7%. The yield on the division’s debt is 4%. The information on the relevant pure play companies is given below: pure play firm beta debt/equity A 1.5 0.6 B 0.8 0.2 What is the project beta of the...

  • 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...

  • Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset...

    Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.51, expects to generate free cash flow of $77 million this year, and anticipates a 3% perpetual growth rate. The industrial chemicals division has an asset beta of 1.13, expects to generate free cash flow of $63 million this year, and anticipates a 2% perpetual growth rate. Suppose the risk-free rate is 2% and the market risk premium is 5%. a. Estimate...

  • Atlas Corp is a privately-held firm with an estimated market value-based D/E = 0.22 and a...

    Atlas Corp is a privately-held firm with an estimated market value-based D/E = 0.22 and a 6.5% cost of debt capital. The firm’s tax rate is 35%. You have identified a comparable firm that has an equity beta of 2.15, a D/E ratio of 0.80, an expected 7.0% cost of debt, and a 30% marginal corporate tax rate. If the risk-free rate is 4% and the market risk premium is 4.2%, what is your estimate of Atlas’s weighted average cost...

  • Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm...

    Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions A throughb D with average betas for each division of 0.8 1.2 1.4 and 1.6 respectively. Assume all current and future projects will be financed with 20 percent debt and 80 percent equity the current cost of equity firm beta of 1.1 and a current risk free rate of 7 is 11 percent and the after tax yoeld on the...

  • Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm...

    Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.7, 1.0, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 50 debt and 50 equity, the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 6 percent) is 13 percent and the after-tax yield on...

  • Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm...

    Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.7, 1.0, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 60 debt and 40 equity, the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7 percent) is 15 percent and the after-tax yield on...

  • Suppose your firm has decided to use a divisional WACO approach to analyze projects. The firm...

    Suppose your firm has decided to use a divisional WACO approach to analyze projects. The firm currently has four divisions. A through D with weighted average betas for each division of 0.8,1.2,1.4,and 1.6 respectively. Assume all current and future projects will be financed with 30 percent debt and 70 percent equity,the current cost of equity(based on the firms beta of 1.1 and a current risk free rate of 6 percent) is 13 percent and the after tax yield on the...

  • 3. Intermountain Resources Inc. has three divisions with the following equity betas: Proportion Division Beta of...

    3. Intermountain Resources Inc. has three divisions with the following equity betas: Proportion Division Beta of Assets Lumber 0.7 X 50% Coal 1.2 X 30% Tourism 1.3 X 20% The risk free rate is 7% and the market risk premium is 8%. The firm's debt costs 7.6% per year. Its tax rate is 25% a) What is Intermountain's cost of equity? b) If the firm uses 40% equity and 60% debt, what is the WACC? E c hare This is...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT