Companion Computer Corporation (CCC), a producer of office equipment, currently has assets of $15 million and a

Question:

Companion Computer Corporation (CCC), a producer of office equipment, currently has assets of $15 million and a beta of 1.4. The risk-free rate is 8 percent, and the market risk premium is 5 percent. CCC would like to expand into the risky home computer market. If the expansion is undertaken, CCC would create a new division with $3.75 million in assets. The new division would have a beta of 2.4.

a. What is CCC’s current required rate of return?

b. If the expansion is undertaken, what would be the firm’s new beta? What is the new overall required rate of return, and what rate of return must the home computer division produce to leave the new overall required rate of return unchanged?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...