--%>
Assignment Help - homework help

Evaluating Beta of a Corporation

Baldwin Corporation is planning to expand into the business of providing on-demand movies. Baldwin has debt-to-equity ratio of .25, its pretax cost of debt is 9%, and its marginal tax rate is 40%. The Harrington Corporation is already in the on-demand movie business, has a beta of 1.5, debt-to-equity ratio of 0.35, and marginal tax rate of 25%. What beta should Baldwin use in evaluating this project? What is the required return on the project if the riskless rate is 5% and the expected return on the market is 10%?

E

Expert

Verified

From the given details,
Harrington’s unlevered beta can be determined as
Bu = BL/(1 + (1 – T)(D/E)) = 1.5/(1 + (1 – 0.25)(0.35) = 1.5/1.2625 = 1.188
Hence with a D/E ratio of 0.25,
BL = BU (1 + (1 – T)(D/E)) = 1.188 (1 + (1 – 0.4)(0.25)) = 1.366
Cost of equity = 5% + 1.366*(10% - 5%) = 11.832%
Cost of debt = 9%*(1 – 0.40) = 5.4%
WACC = 0.8*11.832% + 0.2*5.4% = 10.55%

Thus beta is 1.366 and the required rate of return is 10.55%

   Related Questions in Corporate Finance

  • Q : Explain valuation method for

    We were assigned a valuation of a pharmaceutical laboratory’ shares. Which valuation method is further convenient?

    		•
  • Q : FIN3000 Corporate Finance Task

    Task Description Length: 1000-2000 words (up to 500 words above 2000 permitted) Description: • Complete this assignment in groups of 4-5 students. • Maintain a portfolio of financial issues taken from 8 news sources. • Analyse the articles with reference to theory covered in class and h

    		•
  • Q : Explain breakthroughs on

    Explain breakthroughs on low-discrepancy sequences.

    		•
  • Q : Calculate their after tax cost of debt

    Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of whichrequire semiannual interest payments. Bond A has a coupon rate of 4.0%; a price qu

    		•
  • Q : Intrnational financer what are the

    what are the objectives of international finance

    		•
  • Q : What is the required rate of return on

    Woidtke Manufacturing's stock currently sells for $29 a share. The stock just paid a dividend of $2.50 a share (i.e., D0 = $2.50), and the dividend is expected to grow forever at a constant rate of 9% a year. What st

    		•
  • Q : Compute betas against local indexes

    Does it make any sense to compute betas against local indexes while a company has a great part of its operations outside such local market? I have two illustrations: BBVA and Santander.

    		•
  • Q : How form a portfolio with higher

    Does this make any sense to form a portfolio comprised of companies along with a higher return/dividend?

    		•
  • Q : Problem on Corp stocking Cheever Corp

    Cheever Corp stock is selling at $40 a share. Its dividend in subsequent year will be $2 a share and its β is 1.25. Crane Company has similar growth rate as Cheever. The current stock price of Crane is $55 a share, and its dividend this year is $3. The riskless r

    		•
  • Q : Which method must use to valuate young

    Which method must we use to valuate young companies along with high growth but uncertain futures? Two illustrations were Boston Chicken and Telepizza while they began.

    		•