Question
(20 points) A firm has two major divisions. The first division is involved in telecommunications. The beta of assets for comparable firms in the telecommunication
(20 points) A firm has two major divisions. The first division is involved in telecommunications. The beta of assets for comparable firms in the telecommunication industry is 0.8. This division constitutes 60 percent of the value of the firm. The second division is involved in the cable TV industry. The beta of assets for comparable firms in the cable TV industry is 1.2. This division constitutes 40 percent of the value of the firm. The firm is financed with 30% debt and 70% equity. The debt is risk free. The firm pays no taxes. The risk free rate is 5 percent and the expected return on the market is 12 percent.
a. (10 points) What is the expected return on the firms equity? b. (10 points) The telecommunications division is considering a project with the following cash flows: CO: -20,000 C1: 5000 C2: 8000 C3: 10,000
What is the NPV of this project? (Please recall the WACC can be found by using the asset beta in the CAPM equation when taxes are zero.)
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