Primal Grains Bakery has only two divisions: gluten and gluten-free. You have the following information about asset value and beta of each division. Gluten Division: Market Value = $2.0 Billion, beta = 0.84, Gluten-free division: Market Value = $5.0 billion, beta = 1.33.
The firm has debt outstanding with a market value of $2.1 billion and a market yield of 3% per annun. This debt has a beta of zero. The firm also has $4.9 million in equity outstanding.
The risk free interest rate is 3% and the required return on the market portfolio is 12%. The corporate tax rate is 30%.
a. what is the beta of the firm's assets?
b. what is the beta of the firms equity?
c. what is the required return on the firms equity?
d. what expected return is required to hold the firms total assets?
e. what is the weighted average cost of capital?
f. primal gains bakery ltd. is evaluating opening a bakery in Brisbane to produce gluten and gluten-free products. This new bakery will be financed by a combination of debt and equity such that its capital structure will not change. The new store will cost $1,000,000 to construct and will generate free cash flows of $100,000 per year in perpetuity. What is the NPV of this new store? Should they Build it?