2 meow-seem Question 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 riskefree 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 lS 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 pure play firm A? What is the project beta of the pure play firm B'? What is the average of the project betas of the pure play flrms? What is the new division's beta? What is the cost of equlty of the new division? What is the new division's WACC? Answered by Expert Tutors 1) Project beta of the pure play firm A = 0.99 2) Project beta of the pure play firm B = 0.68 3) Average of the project betas of the pure play firms = 0.84 4) New division's beta = 1.08 We're always improving our 24/7 tutor help'. We X have Finance tutors online now who can help you get unstuck. Ask another question. 5) Cost of equity of the new I! sion = 7.46% 6) New division's WACC = 6.45% Ask Expert Tutors You can ask 39 questions [ ll expire O) Step-hy-step explanation Question 8 0 I 3 points 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 aelow: Pure Play Firm Beta Debt/Equity A 1.5 0.6 B 0.8 0.2 What is the cost of equity of the new division? Answer: 7.46 Question 9 0 / 3 points 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 DebtlEquity A 1.5 0.6 B 0.8 0.2 What is the new division's WACC? Answer: 6.45 n p Type here to search