market risk premium is 5.5%

13.75 wacc

Q2-A: You have been asked to analyze GenCorp, a corporation with food and tobacco subsidiaries. The tobacco subsidiary is estimated to be worth $ 15 billion and the food subsidiary is estimated to have a value of $ 10 billion. The firm has a debt to equity ratio of 1.00. You are provided with the following information on comparable firms: Business Average Beta Average D/E Ratio Food 0.92 25% Tobacco 50% All firms are assumed to have a tax rate of 40%. If the current long-term bond rate is 6%, estimate the current cost of equity of GenCorp. 1.17 Q2-B: Assume now that GenCorp divests itself of the food division for its estimated value of $ 10 billion. a. Estimate the beta for GenCorp if the cash is used to pay down debt. b. Estimate the beta for GenCorp if the cash is retained in the firm and invested in Government Securities