Your firm has two divisions, Mobile, which is in the mobile devices business, and Networks, which...

 

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Your firm has two divisions, Mobile, which is in the mobile devices business, and Networks, which is in the network equipment business. The market value of your firm's assets overall is $10 billion, of which the mobile division makes up $3 billion and the networks division $7 billion. Your firm has debt valued at $2 billion and the debt is risk-free. A regression of the excess return on your firm's equity on the excess return on the market yields a beta of 1. The risk-free rate is 4.0% and the expected return on the market is 6.7%. Assume throughout that the CAPM holds. The beta of the corporate bond index is 0.3. (a) Compute the beta of your firm's assets. (b) Compute the expected return on your firm's assets. % You have the following information on a firm, Cell Inc., which operates exclusively in the mobile devices business and hence has similar risk to your Mobile division. Cell Inc.'s debt-to-equity ratio is 3.4. Cell Inc. has an equity beta of 2 and its debt has the same expected return as the corporate bond index. (c) Compute the beta of the mobile devices business. (d) Compute the cost of capital of the mobile devices business. % Your firm has two divisions, Mobile, which is in the mobile devices business, and Networks, which is in the network equipment business. The market value of your firm's assets overall is $10 billion, of which the mobile division makes up $3 billion and the networks division $7 billion. Your firm has debt valued at $2 billion and the debt is risk-free. A regression of the excess return on your firm's equity on the excess return on the market yields a beta of 1. The risk-free rate is 4.0% and the expected return on the market is 6.7%. Assume throughout that the CAPM holds. The beta of the corporate bond index is 0.3. (a) Compute the beta of your firm's assets. (b) Compute the expected return on your firm's assets. % You have the following information on a firm, Cell Inc., which operates exclusively in the mobile devices business and hence has similar risk to your Mobile division. Cell Inc.'s debt-to-equity ratio is 3.4. Cell Inc. has an equity beta of 2 and its debt has the same expected return as the corporate bond index. (c) Compute the beta of the mobile devices business. (d) Compute the cost of capital of the mobile devices business. %