Question
Nero Violins has the following capital structure: Total Market Value Security Beta ($ millions) Debt 0 $ 116 Preferred stock 0.36 56 Common stock 1.36
Nero Violins has the following capital structure:
| Total Market Value | ||||
| Security | Beta | ($ millions) | ||
| Debt | 0 | $ | 116 | |
| Preferred stock | 0.36 | 56 | ||
| Common stock | 1.36 | 315 | ||
a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?)
b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 5% and a market risk premium of 6%. Ignore taxes.
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Multinational financial management
Authors: Alan c. Shapiro
10th edition
9781118801161, 1118572386, 1118801164, 978-1118572382
