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Problem 4) (20 points) Assume UNR inc. wants you to calculate WACC of its two divisions: Restaurants and Insurance divisions. Betas of these divisions are
Problem 4) (20 points) Assume UNR inc. wants you to calculate WACC of its two divisions: Restaurants and Insurance divisions. Betas of these divisions are unknown. Using comparables approach, we need to compute divisional WACCs. You are given the following information about comparable firms. Publicly traded firms in Restaurants Industry Firm (ticker) Beta Market leverage Mc Donald's Corp. (MCD) 1.2 45% Wendy's Co. (WEN) 1.6 50% Chipotle Mexican Grill, Inc. (CMG) 2.0 60% Publicly traded firms in Insurance Industry Firm (ticker) Beta Market leverage Progressive Insurance Group (PGR) 1.5 65% Aetna, Inc. (AET) 1.4 60% All state (ALL) 0.8 40% . Spread between S&P 500 Composite Returns and Long-Term U.S. Government Bond Returns is 9%. . S. Government Interest Rates on 30-year bond is 4%. UNR inc.'s Restaurant division's Debt Rate Premium above Government is 3%. UNR inc.'s Insurance division's Debt Rate Premium above Government is 2%. Tax rate is 40%. a. (8 points) Assume that target capital structure of Restaurant division is 30% debt and 70% equity. What is the WACC of Restaurant division, under target capital structure? b. (8 points) Assume that target capital structure of Insurance division is 60% debt and 40% equity. What is the WACC of Insurance division, under target capital structure? c. (4 points) Based on your calculations in (a) and (b) which division has higher business risk? Based on your calculations in (a) and (b) which division has higher financial risk
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