Question
You have collected returns on firm X and the S&P500index for five years: Year AD Corp. NYSE 2017 10% 5% 2018 5% 15% 2019 5%
You have collected returns on firm X and the S&P500index for five years:
Year AD Corp. NYSE
2017 10% 5%
2018 5% 15%
2019 5% 8%
2020 20% 12%
2021 5% 5%
There are 20 million shares outstanding, and the current market price is $2 per share. The firm has $20 million in debt outstanding. The firm has a tax rate of 36%. Equity risk premium is 5.5%.
a. What would an investor in Firm x's stock require as a return if the risk free rate is 6%?
b. Assume now that Firm x has three divisions of equal size (in market value terms). It plans to divest itself of one of the divisions for $20 million in cash and acquire another for $50 million (it will borrow $30 million to complete this acquisition). The division it is divesting is in a business line where the average unlevered beta is 0.20, and the division it is acquiring is in a business line where the average unlevered beta is 0.80. What will the beta of firm x be after this acquisition?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started