Food processing:

Yield corresponding to bond rating of BBB = 4.1%

After Tax Cost of Debt = Rd = (1 - Tax Rate) x Yield

= (1-0.37) x 4.1 = 2.583%

Average Beta= (0.55 + 0.6 + 0.7 + 0.75 + 0.5 + 0.55 + 0.65 + 0.6 + 0.7 + 0.8) / 10

= 0.64

Rf = 2.8

Rm = 6%

Cost of Equity = Re = Rf + Average Beta x Rm

= 2.8 + 0.64 x 6 = 6.64%

We = 0.8, Wd = 0.2

Risk Adjusted Cost of Capital = We x Re + Wd x Rd

= 0.8 x 6.64 + 0.2 x 2.583 = 5.8286 %

Instruments:

Yield corresponding to bond rating of BBB- = 4.6%

After Tax Cost of Debt =(1 - Tax Rate) x Yield corresponding to BBB bond = (1 - 0.37) x 4.6 = 2.898%

Average Beta of Comparable Company's

= (1.06 + 1.4 + 1.3 + 1.25 + 1.15 + 1.35 + 1.10 + 0.52) / 8

= 1.14125

Rf = 2.8 %, Rm = 6%

Cost of Equity = Re = Rf + Average Beta x Rm = 2.8 + 1.14125 x 6 = 9.6475%

We = 0.8 and Wd = 0.2

Risk Adjusted Cost of Capital = We x Re + Wd x Rd

= 0.8 x 9.6475 + 0.2 x 2.898 = 8.2976 %

Give two reasons to support the use of one discount rate and two reasons to support different discount rates for each division.