Question
You company (company A) has a market value of $15 billion and a beta of 0.75. You are thinking about buying another company (company B)
You company (company A) has a market value of $15 billion and a beta of 0.75. You are thinking about buying another company (company B) that has the following: Expected CFs of $50 million this year.
Expected growth rate of CFs is 2.5% per year (growth is not applied to this years CF) for the next 5 years and 5% thereafter.
Beta = 1.75 You also have the following information regarding general market conditions:
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1. What is the expected rate of return for your company?
2. What discount rate should you use to evaluate company B?
3. How much is company B worth?
4. If you purchase company B for the price we computed in (3), what will your new Beta be?
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