Zi Company has two subsidiaries that operate in different industries: Wang Pharma carries out extensive research on pharmaceutical products, and Zhang PH manufactu of Zi Co. wants to estimate its levered beta for the purpose of determining the company’s cost res and distributes personal hygiene products (soaps, deodorants, toothpastes, etc.). The CFO of equity. The pharmaceutical subsidiary is worth $10 million while the personal hygiene subsidiary is worth $40 million. The firm has a debt-to-equity ratio of 1.0, and the marginal tax rate for all firms considered is 20%. The risk-free rate is 3.0%. The following information has been obtained for publicly-traded firms with comparable systematic risk:

Industry	Average Beta	Average D/E Ratio
Pharmaceutical research	1.50	25%
Personal hygiene	0.90	75%

NOTE: Average betas denote the average of levered equity betas for firms in each industry.

a. Calculate the unlevered beta for an average firm in each industry.

b. Calculate the unlevered beta for Zi Co. [Hint: this will be the weighted average of unlevered betas where the weights are taken in proportion to the subsidiaries’ values in the firm.]

c. Calculate the levered beta for Zi Co

d. Calculate the levered cost of equity for the entire company.

Answer rating: 100% (QA)

aThe average beta for firms in the pharmaceutical research industry is 150 and the average beta for firms in the personal hygiene industry is 090 The ... View the full answer