Question
Please use long hand calculation. (Please do not use excel). You have an enemy in the firm. He's trying to make you look bad. You're
Please use long hand calculation. (Please do not use excel).
You have an enemy in the firm. He's trying to make you look bad. You're the head of the dairy division and he's the head of the electronics division in this weird conglomerate (Amalgamated Milk and Video: AMV). He says his division, which is half of the firm, has a return of 12% and the firm's stock (the company has no debt) has a yield of 10%. He claims your division's assets are not pulling their weight since they're bringing down the stock return. What return are your assets paying? What potential explanation could you give the chairperson for this difference in asset returns?
In order to substantiate your claim, you collect some date on related firms. You found an electronics firm (similar to AMV's electronics division) that has a stock beta of 1.2, a debt beta of 0.8 and was half debt and half equity. You also found a dairy firm (similar to your division) that has a stock beta of 0.7, a debt beta of 0.1and also is half debt-half equity. The risk-free rate is 4% and the expected return on the market is 14%. Whose division looks bad now? Explain, using this data.
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