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?



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  • CreatedFebruary 25, 2015
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