Question: Albright Properties Inc. (API) has three divisions: Division Beta Proportion of Firm's Assets Property management 1.4 30% Land resources 1.9 40 Financial services 30 The

Albright Properties Inc. (API) has three divisions:

Division Beta Proportion of Firm's Assets Property management 1.4

30%

Land resources 1.9

Financial services

The leveraged beta for API is 1.5. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Services Division's capital structure is 60 percent debt and 40 percent equity. API is planning to finance new projects in that division with a capital structure of 70 percent debt and 30 percent equity. The risk-free rate is 7 percent, and the market risk premium is 8.8 percent. The pretax cost of debt to API is 19 percent. The tax rate is 40 percent. What discount rate should API apply to the cash flows from "new" projects in the Financial Services Division? Round your answer to one decimal place.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Albright Properties, Inc. (API) has three divisions: The leveraged beta for API is 1.2. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial...

Consider the following information: Rate of Return if State Occurs State of Economy Boom :57 Bust of Economy .66 .34 Probability of State Stock A .09 .13 Stock B Stock C .03 .19 .24 -.04 a. What is...

Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...

Suppose in a given area there are three power plants, each of which emits SO 2 with different intensities. The abatement cost functions for each firm j are: (a) Set up the conditions for the socially...

It is asserted that 80% of the cars approaching an individual toll booth in New Jersey are equipped with an E-ZPass transponder. Find the probability that in a sample of six cars: a. All six will...

What is an injunction?

1. Explain reasons for rules.

The following information relates to Hudson City for its scal year ended December 31, 2014. On January 31, 2014, the city purchased as an investment for its debt service fund a fteen-year, 6...

Choose the correct code in which the source code must be translated into in order to make a computer understand a program .

Consider a smart car that incorporates various innovative mechanisms ensuring a high degree of comfort, safety, security, user experience, etc., by incorporating different types of embedded systems....

Pedro buys hamburguers from Ana at 3 dollar per unit and sells them at 9 dollar per unit. Ana produces hamburguers at 0.30 dollar per unit. , Pedro discard all extra hamburguers that was not able to...

Lean manufacturing is a very popular approach to inventory management with a lot of examples of both success and failure. In fact the idea and the principles have also been applied beyond...

What is cultural tourism and why is it growing?

1. (A) Select the country in which you have spent the majority of your time up to now. Is the type of leadership in that country/culture changing? What is the basis/ evidence for your answer? (B)...

The growth of the coal mining industry in the US has been on a downward spiral over the last few years. How does this impact the competitive rivalry within the industry?

Cherokee Incorporated is a merchandiser that provided the following information: Amount Number of units sold 10,000 Selling price per unit $ 16 Variable selling expense per unit $ 1 Variable...

Frontland Advertising creates, plans, and handles advertising campaigns in a three-state area. Recently, Frontland had to replace an inexperienced office worker in charge of bookkeeping because of...

4. Consider a process {Xn, n = 0, 1, . . .}, which takes on the values 0, 1, or 2. Suppose where 2j =0 PI ij = 2j =0PII ij = 1, i = 0, 1, 2. Is {Xn, n 0} a Markov chain? If not, then show how, by...

3. In Exercise 2, suppose that if it has rained for the past three days, then it will rain today with probability 0.8; if it did not rain for any of the past three days, then it will rain today with...

7. In Example 4.4 suppose that it has rained neither yesterday nor the day before yesterday. What is the probability that it will rain tomorrow?