Question

Weston Enterprises is an​ all-equity firm with two divisions. The soft drink division has an asset beta of

0.690.69​,

expects to generate free cash flow of

$ 72$72

million this​ year, and anticipates a

3 %3%

perpetual growth rate. The industrial chemicals division has an asset beta of

1.081.08​,

expects to generate free cash flow of

$ 56$56

million this​ year, and anticipates a

2 %2%

perpetual growth rate. Suppose the​ risk-free rate is

3 %3%

and the market risk premium is

6 %6%.

a. Estimate the value of each division.

b. Estimate​ Weston's current equity beta

c. Estimate​ Weston's current cost of capital. Is this cost of capital useful for valuing​ Weston's projects? How is​ Weston's equity beta likely to change over​ time?

a. Estimate the value of each division.

The cost of capital for the soft drink division is

nothing​%.

​ (Round to two decimal​ places.)The value of the soft drink division is

​$nothing

million.  ​(Round to one decimal​ place.)The cost of capital for the industrial chemicals division is

nothing​%.

​ (Round to two decimal​ places.)The value of the industrial chemicals division is

​$nothing

million. ​ (Round to one decimal​ place.)

b. Estimate​ Weston's current equity beta.

​Weston's current equity beta is

nothing.

​ (Round to two decimal​ places.)

c. Estimate​ Weston's current cost of capital. Is this cost of capital useful for valuing​ Weston's projects? How is​ Weston's equity beta likely to change over​ time?

​Weston's current cost of capital is

nothing​%.

​ (Round to two decimal​ places.)

Is this cost of capital useful for valuing​ Weston's projects?  ​(Select the best choice​ below.)

A.

Useful. Individual divisions are always less risky than the​ firm's cost of capital.

B.

Not​ useful! Individual divisions are always more risky than the​ firm's cost of capital.

C.

Useful. Individual divisions are sometimes less risky and sometimes more risky than the​ firm's cost of capital.

D.

s this cost of capital useful for valuing​ Weston's projects?  ​(Select the best choice​ below.)

A.

Useful. Individual divisions are always less risky than the​ firm's cost of capital.

B.

Not​ useful! Individual divisions are always more risky than the​ firm's cost of capital.

C.

Useful. Individual divisions are sometimes less risky and sometimes more risky than the​ firm's cost of capital.

D.

Not​ useful! Individual divisions are sometimes less risky and sometimes more risky than the​ firm's cost of capital.

How is​ Weston's equity beta likely to change over​ time?  ​(Select the best choice​ below.)

A.Over​ time, Weston's equity beta will decline toward

0.690.69​,

as the soft drink division has a lower growth rate and so will represent a smaller fraction of the firm.

B.Over​ time, Weston's equity beta will rise toward

1.081.08​,

as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

C.Over​ time, Weston's equity beta will rise toward

0.690.69​,

as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

D.Over​ time, Weston's equity beta will decline toward

0.690.69​,

as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

Not​ useful! Individual divisions are sometimes less risky and sometimes more risky than the​ firm's cost of capital.

How is​ Weston's equity beta likely to change over​ time?  ​(Select the best choice​ below.)

A.Over​ time, Weston's equity beta will decline toward

0.690.69​,

as the soft drink division has a lower growth rate and so will represent a smaller fraction of the firm.

B.Over​ time, Weston's equity beta will rise toward

1.081.08​,

as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

C.Over​ time, Weston's equity beta will rise toward

0.690.69​,

as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

D.Over​ time, Weston's equity beta will decline toward

0.690.69​,

as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

Click to select your answer(s).

Answer 1

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