Problem
Whistler Corp. has an equity CAPM β of 1.2 and is financed 20% with debt. Its debt has a beta of 0.3 using the CAPM. Assume that the risk-free rate is 2%, the market risk premium is 7.7%, and the corporate tax rate is 21%.
i. What is Whistler Corp.'s asset beta?
ii. What is Whistler Corp.'s expected asset return?
iii. If Whistler is thinking about buying Sea-to-Sky Inc., how should Whistler determine the appropriate discount rate for Sea-to-Sky Inc.?
iv. Sea-to-Sky Inc. has an equity CAPM β of 1.5. Is it possible for Whistler Corp. to have a greater standard deviation of stock returns than Sea-to-Sky Inc.?