25. Amalgamated Products has the following operating divisions and respective percentages of the companys total assets: Asset Percentage Division (% of companys total assets) Chemicals 20 Polymers 30 Food Additives 50 To estimate the cost of capital for each operating division, management has identified the following three competitors: Estimated Competitor Equity Beta Debt/(Debt + Equity) Consolidated Chemicals 1.2 0.4 Mongo Macromolecules 1.6 0.2 Flavors & Fragrances 0.8 0.3 a) Assuming that the debt of all of these companies is risk- free, estimate the asset beta for each of Amalgamated Products divisions. Assume that Amalgamated Products debt to (debt plus equity) ratio equals 0.4. What is Amalgamated Products equity beta? b) Assume that the risk-free interest rate is 3% per year and the expected return on the Wilshire 5000 Index is 8% per year. Estimate the cost of capital for each of Amalgamated Products divisions, and for Amalgamated Products as a whole.

In answering part b, is it preferable to use the asset beta or the equity beta? Why? c) Repeat the previous calculations assuming that every companys debt has a beta of 0.2. How much does each divisions and Amalgamated Products cost of capital change relative to assuming that their debt is risk-free?