Question
Woolworths Ltd (WOW) has a debt to equity ratio of approximately 1:2. You are considering purchasing supermarket business (like Woolworths) but your business will target
Woolworths Ltd (WOW) has a debt to equity ratio of approximately 1:2. You are considering purchasing supermarket business (like Woolworths) but your business will target a Debt-to-equity of 1 to 1.83 (i.e 1:/1.83).
What is the required return on equity relevant to the the new business, given:
- WOW beta of 0.95.
- risk free rate is 2.6% p.a,
- WOW and the new business can borrow at 5%p.a,
- the tax rate is 30%
- a reasonable estimate of the equity market premium is 6%.
Step by Step Solution
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Step: 1
To calculate the required return on equity for the new business we can use the Capital Asset Pricing ...
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Intermediate Accounting
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy
11th Canadian edition Volume 2
1119048540, 978-1119048541
