# Question

The analysis of a two-division company (DV2) has indicated that the beta of the entire company is 1.35. The company is 100-percent equity funded. The company has two divisions:

Major League TV (MLTV) and Minor League Shipping (MLS), which have very different risk characteristics. The beta of a pure-play company comparable to MLTV is 1.85 while for MLS the beta of a comparable pure-play company is only 0.75. The risk-free rate is 3 percent and the market risk premium is 5 percent. Assume all cash flows are perpetuities and the tax rate is zero.

a. Calculate the cost of capital of the entire company.

b. The company is evaluating a project that has the same type of risk as MLTV. The project requires an initial investment of $10,000 and pays $1,000 per year forever. Should the company undertake this project? Why or why not?

Major League TV (MLTV) and Minor League Shipping (MLS), which have very different risk characteristics. The beta of a pure-play company comparable to MLTV is 1.85 while for MLS the beta of a comparable pure-play company is only 0.75. The risk-free rate is 3 percent and the market risk premium is 5 percent. Assume all cash flows are perpetuities and the tax rate is zero.

a. Calculate the cost of capital of the entire company.

b. The company is evaluating a project that has the same type of risk as MLTV. The project requires an initial investment of $10,000 and pays $1,000 per year forever. Should the company undertake this project? Why or why not?

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