Question
Assume that the risk free interest rate is 2% and the market risk premium is 5%. Consider a conglomerate (entirely financed with equity) that currently
Assume that the risk free interest rate is 2% and the market risk premium is 5%. Consider a conglomerate (entirely financed with equity) that currently has three business units with the following information:
Business unit: Beta Weight
BU1 0.7 1/3
BU2 1.1 1/3
BU3 1.5 1/3
Where the weights refer to the relative size of each business unit.
- What is the cost of equity for the conglomerate?
- If the conglomerate divests (sells) BU1, what will then be the new expected cost of equity?
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Analysis for Financial Management
Authors: Robert C. Higgins
10th edition
007803468X, 978-0078034688
