You were appointed the CFO of a firm with 2 divisions: Div. 1 -- produces regular telephones Div. 2 -- produces specialty micro-chips which are used in cell phones

Given Information: Market value of your firms debt = $100 million Market value of your firms equity = $100 million Overall/total value of firm = $200 million. Beta of firms equity = 2 Firms debt = riskless. Expected excess return on the market over the riskless rate = 8% percent Risk-free rate = 2%

Assume that the CAPM holds.

Suppose that you cannot identify a firm that is comparable in systematic risk to your cell phone division (Division 2), but do manage to identify a single-segment telephone firm, firm X, whose underlying business has systematic risk (asset beta) identical to that of your telephone business (Division 1). This firm has an equity beta of 1.0, a debt beta of 0.1, and a debt-to-equity ratio of 0.5. Furthermore, you expect total cash flow (to the asset) from Division 1 to be $10 million per year indefinitely (from t=1 onward). Question 1: What is the value of Division 1?

Question 2: What is the value of Division 2? (Hint: Start by working out the asset beta of Division 1)