Question
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.60, expects to generate free cash flow
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Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.60, expects to generate free cash flow of $50 million this year, and anticipates a 3% perpetual growth rate. The industrial chemicals division has an asset beta of 1.20, expects to generate free cash flow of $70 million this year, and anticipates a 2% perpetual growth rate. Suppose the risk-free rate is 4% and the market risk premium is 5%.
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Estimate the value of each division.
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Estimate Westons current equity beta and cost of capital (remember, the beta of a
portfolio is the portfolio of the betas). Is this cost of capital useful for valuing Westons projects? How is Westons equity beta likely to change over time?
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.60, expects to generate free cash flow of $50 million this year, and anticipates a 3% perpetual growth rate. The industrial chemicals division has an asset beta of 1.20, expects to generate free cash flow of $70 million this year, and anticipates a 2% perpetual growth rate. Suppose the risk-free rate is 4% and the market risk premium is 5%.
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Estimate the value of each division.
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Estimate Westons current equity beta and cost of capital (remember, the beta of a
portfolio is the portfolio of the betas). Is this cost of capital useful for valuing Westons projects? How is Westons equity beta likely to change over time?
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