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Southern Discomfort, Inc. makes soda bottles and is considering diversifying its business by purchasing LuvPet, Inc., a company that makes pet food. Southerns beta is

Southern Discomfort, Inc. makes soda bottles and is considering diversifying its business by purchasing LuvPet, Inc., a company that makes pet food. Southerns beta is 1.70, and the beta of LuvPet is 0.80. The market risk premium is 13.60%, and the Treasury bill yield is 1.80%. LuvPet is projected to produce cash flows of $35 million in perpetuity.

a. What is the appropriate discount rate for valuing LuvPet?

b. What is the estimated value of the LuvPet purchase?

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