BFC is an agribusiness with a highly variable cash flow, but where the risks tend to be related to weather, commodity price cycles and other random factors not closely tied to the business cycle. Indeed, the correlation between the return on BFC equity and the return on the S&P 500 is just 0.3. However, the variance of the return on BFCs equity is 12.25 times the variance of the return on the S&P 500.

(a) What is the CAPM beta coefficient for BFC equity?

(b) If the current risk-free rate is 3% and the expected return on the S&P 500

is 10.5%, what is the expected return on BFC equity according to CAPM?

BFC currently has 75,000 shares outstanding currently selling at $52.50 per share and no debt. BFC is considering diversifying into food processing, which is a business with a much less variable cash flow, but one that is also somewhat more correlated with the business cycle. A traded firm that is closest to the type of business BFC wishes to enter, GoodFood, appears to maintain a debt/equity ratio of 0.6 (looking at its past balance sheets). The return on GoodFoods debt has a CAPM beta coefficient of 0.1, while its equity CAPM beta is 0.8. Assume that the corporate tax effects of debt approximate the overall effects of debt on the cost of capital. The corporate tax rate is 34%.

(c) What is the current implied return on unlevered equity for GoodFood?