Question 3.2 (2 Marks)

Pharmaceutical Manufactory Ltd. has a beta of 1.5 is expanding into a new, unrelated industry by way of forming a new division. The new division is furniture manufacturing, an industry where pure-play companies typically have a beta of 2.0. The risk-free rate is 8% and the market risk premium is 10%. What would an appropriate divisional beta be for the new division?

Required: Copy or type the above question into a prompt and evaluate the feedback. Discuss your findings regarding the accuracy of the answer and how such a tool may best be employed, very briefly.