Your firm has two divisions (A) and (B). Both divisions do not have any leverage and will not take on leverage in the future. Division (A) is expected to generate unlevered free cash flows (FCFs) of $100 million annually in perpetuity. Division (B) is expected to generate FCFs of $200 million annually in perpetuity. Both divisions generate the first FCF in one year from today.

You selected the following two comparable firms to determine your expected return on assets. The comparable firm for division A, called Comp A has a market value of $300 million and continuously rebalances to a debt-to-value ratio of 30%. Comp A has $200 million of identifiable assets. Comp A’s expected return on debt is 4%. Comp A’s expected return on equity is 8%. The comparable firm for division B, called Comp B has a market value of $100 million and continuously rebalances to a debt-to-value ratio of 50%. Comp B has $50 million of identifiable assets. Comp B’s expected return on debt is 5%. Comp B’s expected return on equity is 10%.

What is your firm’s expected return on assets?

Answer rating: 100% (QA)

Expected return on assets Division As expected return on equity Division Bs ex... View the full answer