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The LoLev Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2. Its ratio of debt to equity is 0.3. The
- The LoLev Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2. Its ratio of debt to equity is 0.3. The HiLev Corporation's equity has a beta of 2. Its debt has a beta of zero. HiLev's ratio of debt to equity is 0.5. The riskfree rate is 8%, and the expected return on the market portfolio is 19%. Assuming the CAPM holds, and that there are no taxes or costs of financial distress, answer the following:
- LoLev is thinking of investing in the same line of business that HiLev is engaged in. What discount rate should it use?
- Now suppose the LoLev Corporation has decided to invest in HiLev's line of business. These projects now constitute 10% of the overall value of the LoLev's Corporation. Given that its debt/equity ratio and the beta of its debt remain unchanged, calculate the new value of LoLev's equity beta.
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