Suppose your firm operates a chain of video rental stores in South Bend. Your firms beta is
Question:
Suppose your firm operates a chain of video rental stores in South Bend. Your firm’s beta is 1.35, its cost of debt is 6.25% at its current D/E ratio of 0.30, and its marginal tax rate is 21%. Assume a risk-free rate of 3.2%, a market risk premium of 5.8%.
a. You are planning to expand through the purchase of a privately-held rival chain of video rental stores in the SB area. What discount rate should you use for your analysis of this expansion?
b. You are also considering acquiring a privately-held takeout pizza business. A comparable public firm (Pizza World) has a stock beta of 0.95, a D/E ratio of 0.20, and tax rate of 20%. If you will finance the acquisition with your usual mix of debt and equity, what cost of capital should you use for your analysis of this acquisition?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw