Question
Food & Tobacco, Inc (FAT) operates in two lines of business: Food with an estimated value of $10 billion and Tobacco with an estimated value
Food & Tobacco, Inc (FAT) operates in two lines of business: Food with an estimated value of $10 billion and Tobacco with an estimated value of $15 billion. Your task is to estimate the cost of equity.
Line of business Average levered Beta Average D/E ratio
Food Industry 0.92 25%
Tobacco Industry 1.17 50%
Currently the firm has a D/E ratio of 1. Tax rate for the firm is 40%. Assume the current risk free rate is 6% and the market risk premium is 5.5%.
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Financial Markets and Institutions
Authors: Jeff Madura
11th Edition
1133947875, 9781305143005, 1305143000, 978-1133947875
