Question
Please answer the followings for the pharmaceutical company according to the information below. Department/ Beta /Market Value R&D/ 2.3 /$200 million Clinical Research/ 1.8/ $250
Please answer the followings for the pharmaceutical company according to the information below.
Department/ Beta /Market Value
R&D/ 2.3 /$200 million
Clinical Research/ 1.8/ $250 million
Operations/ 1.3/ $350 million
a. What is the beta of the equity for the firm?
b. If the risk free rate is 7% and the spread between the return on all stocks (market risk premium) is 7.5%, estimate the cost of equity for the R&D department?
c. What is the cost of equity for the entire firm?
d. Free cash flow to equity investors in the current year (FCFE) for the entire firm is $10.4 million and for the R&D department, it is $6.1 million. If the total firm and the R&D department are expected to grow at the same 9% rate into the foreseeable future, estimate the market value of the firm and of the R&D department.
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