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Fortune Products has two operating divisions, clothing and electronics. The firm has $20 M of risk-free debt outstanding. The market value of its equity is

  1. Fortune Products has two operating divisions, clothing and electronics.
    • The firm has $20 M of risk-free debt outstanding.
    • The market value of its equity is $30 M.
    • The risk-free rate is 4% and the market risk premium is 8%.
    • There are no corporate taxes.
    • The equity beta is 2.9.
    • The electronics division is financed for half by debt of its total value.
    • The clothing division is financed 100% by equity.

  1. Calculate the expected return on equity for Fortune Products.
  2. Evaluate the cost of capital for each one of Fortune Products divisions (Electronics and Clothing).
  3. Evaluate the cost of capital for Fortune Products.

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