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In 1980, Saab-Scania plans to enter the agricultural machinery industry. As part of its expansion plan, Saab-Scania is looking to acquire a company specializing in
In 1980, Saab-Scania plans to enter the agricultural machinery industry. As part of its expansion plan, Saab-Scania is looking to acquire a company specializing in artificial intelligence-assisted industrial equipment. A potential target is AExe Lab, Inc., a private startup firm with no debt in its capital structure. Saab-Scania is evaluating AExa Lab's two divisions, Software and Robotics. The analyst of Saab-Scania has collected information on historical returns on the market portfolio and the relevant industries: Answer questions a) and b) below. (Lecture notes p.21, and the basic thought experiment concerning the discount rate and valuation) a) Assume that the risk-free rate is 6%. Using the information provided, determine the approximated CAPM betas for AExe Lab's Software and Robotics divisions, respectively, and then calculate the required rates of return on each division. Answer (show the steps/calculation toward your results): b) Despite the analyst's estimates, the board of directors of Saab-Scania recommend: "Given high equity premia in 1960 s through 1970 s, a discount rate of 20% must be used for all project evaluations." Had the board's recommendation been accepted, for which division of AExe Lab would SaabScania end up overpaying? Answer (no calculation required)
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