In 1990, John Deere is looking to acquire a company specializing in developing artificial intelligence (AI) assisted agricultural machinery. A potential target is A-Eye, Inc., which has two divisions, namely, Software Development and Robotics Technology. A-Eye is a private start-up firm and has no debt in its capital structure. John Deere is considering acquiring one of A-Eye's divisions. The analyst of John Deere has collected information on historical returns on the market portfolio and the relevant industries: 

 

                 

	Market portfolio	Covariance with the market
Estimation period	Mean return	Variance	Software industry	Robotics industry
1960-1989	0.10	0.020	0.028	0.052

Answer questions (a) and (b) below.  

 

1. Assume that the risk-free rate is 5%. Find the CAPM betas for the Software division and the Robotics division of A-Eye to determine the required rates of return on each division.

Answer (show the steps/calculation toward your results):

Despite the analyst's estimates, the manager of John Deere has his own valuation principle: "Use 15% as the discount rate for any valuation problems." Had the manager's rule been applied, for which division of A-Eye, if acquired, would John Deere end up overpaying? 

Answer (no calculation required):

Answer rating: 100% (QA)

CAPM betas and required rates of return Based on the CAPM model the required rate of return for each ... View the full answer