I currently run web services hosting business similar to Amazon Web Services. Web services companies trade in the stock market with a beta of 1.0. I am also considering buying an oil drilling supply business. It generates $1 billion in sales with a pretax operating profit of 50%. I pay 20% taxes, and my WACC is 10%. The business is not growing, but it is not expected to shrink, and the profit margins have been stable for many years. Oil drilling companies trade in the stock market with a beta of 2.0. I can buy this business for $2 billion today.

What should I do? Assume a risk-free rate of return equal to 3%.

Answer rating: 100% (QA)

I currently run web services hosting business similar to Amazon Web Services Web services companies trade in the stock market with a beta of 10 I am a... View the full answer