The LoLev Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2. Its debt-to-value ratio is 30%. 

 

The HiLev Corporation's equity has a beta of 2. Its debt has a beta of zero. HiLev's debt-tovalue ratio is 40%. 

 

The riskfree rate is 8%, and the expected return on the market portfolio is 14%. Assuming the CAPM holds, and that there are no taxes or costs of financial distress, Answer the following: 

 

a) LoLev is thinking of investing in the same line of business that HiLev is engaged in. 

What discount rate should it use? 

 

b) Now suppose the LoLev Corporation has decided to invest in HiLev's line of business. The  projects now constitute 50% of the overall value of the LoLev's Corporation. 

Assuming that its debt-to-value ratio and the beta of its debt remain unchanged, Calculate the new value of LoLev's equity beta.

Answer rating: 100% (QA)

Answer a To calculate the discount rate that LoLev should use for investing in the same line of busi... View the full answer