Southern Discomfort, Inc. makes soda bottles and is considering diversifying its business by purchasing LuvPet, Inc., a company that makes pet food. Southerns beta is 1.70, and the beta of LuvPet is 0.80. The market risk premium is 13.60%, and the Treasury bill yield is 1.80%. LuvPet is projected to produce cash flows of $35 million in perpetuity. a.What is the appropriate discount rate for valuing LuvPet? b.What is the estimated value of the LuvPet purchase?

Answer rating: 100% (QA)

a The appropriate discount rate for valuing LuvPet can be determined using the Capital Asset Pricing ... View the full answer