Question
[Division cost of capital] The Oko-Cocoa Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2. Its debt/equity (D/E) ratio is
[Division cost of capital] The Oko-Cocoa Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2. Its debt/equity (D/E) ratio is 0.3. The Johnson Corporation's equity has a beta of 2. The company has zero beta debt, and its debt/equity ratio is 0.5. The risk free rate is 8%, and the expected return on the market portfolio is 19%. There are no taxes. (a) The Johnson Corporation is thinking of investing in the same line of business that Oka-Cocoa is engaged in. What discount rate should it use? (b) Now suppose the Johnson Corporation has decided to invest in projects of this type. These projects now constitute 10% of the overall value of the Johnson Corporation. Given that its debt/equity ratio and the beta of its debt remain unchanged, what will the beta of Johnson's equity be now?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started