The analysis of a two-division company (DV2) has indicated that the beta of the entire company is
Question:
Major League TV (MLTV) and Minor League Shipping (MLS), which have very different risk characteristics. The beta of a pure-play company comparable to MLTV is 1.85 while for MLS the beta of a comparable pure-play company is only 0.75. The risk-free rate is 3 percent and the market risk premium is 5 percent. Assume all cash flows are perpetuities and the tax rate is zero.
a. Calculate the cost of capital of the entire company.
b. The company is evaluating a project that has the same type of risk as MLTV. The project requires an initial investment of $10,000 and pays $1,000 per year forever. Should the company undertake this project? Why or why not?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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a Required return on the entire company is determined using the beta ...View the full answer
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Related Book For 
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
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