Suppose Chance Chemical Company's management conducts a study and concludes that if Chance expanded its consumer products

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Suppose Chance Chemical Company's management conducts a study and concludes that if Chance expanded its consumer products division (which is less risky than its primary business, industrial chemicals), the firm's beta would decline from 1.2 to 0.9. However, consumer products have a somewhat lower profit margin, and this would cause Chance's constant growth rate in earnings and dividends to fall from 7 to 5 percent.

a. Should management make the change? Assume the following: kM = 12%; kRF = 9%; D0 = $2.00.

b. Assume all the facts as given above except the change in the beta coefficient. How low would the beta have to fall to cause the expansion to be a good one?

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Fundamentals of Financial Management

ISBN: 978-0324272055

10th edition

Authors: Eugene F. Brigham, Joel F. Houston

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