A large food processor and distributor is considering expansion into a chain of privately owned sports shoe outlets. The food company wishes to estimate the risky discount rate for such investments so as to negotiate a fair price for the aquisition. Unfortunately, there are no stock exchange-listed sports show companies with a price history with which a "sports shoe outlet beta" can be estimated. However, excutives are considering using the price history of another company to estimate the beta. Which of the following companies would be the most appropriate? Explain.
a. Another large food company.
b. A holding company for a footbal team.
c. A company that manufactures shoes.
d. A chain of swimwear and surfboard stores in California.
4. A corporation's securities have the followin betas and market values:
Beta Market Value ($)
Debt 0.1 100,000
Preferred 0.4 200,000
Common 1.5 100,000
Calculate the following figures given a riskless interest rate of 10% and market risk premium of 5%:
a. Discount rates for each security.
b. The asset beta for the corporation.
c. The weighted average cost of capital.
d. The discount rate for the unlevered assets.