1. 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:
2. LoLev is thinking of investing in the same line of business that HiLev is engaged in. What discount rate should it use?
3. 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.