Question- Stren Alumni, a diversified conglomerate, is deciding whether to buy a copper mine. Stern Alumni already owns some gold mines and has recently invested in the biotech industry. Stern Alumni's cost of capital is currently 10%. The following is list of other companies for which market data are available. As a simplifying assumption you can set all debt betas equal to zero. What opportunity cost of capital should Stern Alumni use for evaluating? Whether to buy the copper mine? Use a risk free rate of 7% and a market risk premium (rm - rf) of 8%.
|
Firm
|
Industry
|
Shares (in millions)
|
Price/share
|
Debt (Book value in millions)
|
Beta Equity
|
|
A
|
Gold/Biotech
|
3
|
10
|
15
|
1
|
|
B
|
Copper
|
1
|
5
|
1
|
1.02
|
|
C
|
Copper
|
2
|
20
|
0
|
0.8
|
|
D
|
Copper
|
1.5
|
3
|
3
|
1.37
|