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BigCo has a market value of $1 billion and a beta of 0.9. It has three divisions: Chemical processing, oil and gas, and plastic products.
- BigCo has a market value of $1 billion and a beta of 0.9. It has three divisions: Chemical processing, oil and gas, and plastic products. They are thinking about buying another chemical producer Chemco. Chemco is expected to earn cash flows of $9 million this year and cash flows are expected to grow 4% per year after. The beta of Chemco is 1.4. Risk free rate is 4% and the expected return on market is 11%.
- What is the expected rate of return on BigCo?
- What discount rate should BigCo use to evaluate ChemCo and why?
- How much is ChemCo worth?
- Suppose BigCo acquires Chemco for the price in (c). What will be BigCos new beta after adding ChemCo?
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International Finance
Authors: Keith Pilbeam
2nd Edition
0333730976, 978-0333730973
