Question

In: Finance

PPC is a large conglomerate thinking of entering the F&B business, where it olans to finane...

PPC is a large conglomerate thinking of entering the F&B business, where it
olans to finane projects with a debt-to-value ratio of 40 percent. There is curre
ntly one firm in the F&B industry, QV F&Bs. This firm is financed with 25 percen
t debt. The beta of QV's equity is 1.5. QV, has a borrowing rate of 12 percent, a
nd PPC expects to borrow for its F&B venture at 10 percent. The corporate taxr
ate for both fims is 40, the market risk premium is 8.5 percent, and the riskles
s interest rate is 8 percent. What is the appropriate discount rate for PPC to use
for its F&B venture?

Solutions

Expert Solution

Ans - In this method we use WACC( weighted average cost of capital ) which is calculated by multiplying interest rate by weights of capital structure

For calculating equity return we take CAPM approach, but for this beta is not available. Then for calculating beta, we take beta for other company and unlevered it and then levered with our capital structure

jeff jeffy answered 7 months ago
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