Question

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

0.64, expects to generate free cash flow of $68 million this​ year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.11​, expects to generate free cash flow of

$75 million this​ year, and anticipates a 3% perpetual growth rate. Suppose the​ risk-free rate is 4% and the market risk premium is 4%.

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 _____%.  (Round to two decimal​ places.)

The value of the soft drink division is

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

The cost of capital for the industrial chemicals division is _____%.  (Round to two decimal​ places.)

The value of the industrial chemicals division is

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

b. Estimate​ Weston's current equity beta.

​Weston's current equity beta is ____​ (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 _____%. (Round to two decimal​ places.)

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

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

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

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

D.Useful. Individual divisions are always less 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 rise toward 1.11​, as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

B.Over​ time, Weston's equity beta will decline toward 0.64​, 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 decline toward 0.64​, as the soft drink division has a lower growth rate and so will represent a smaller fraction of the firm.

D.Over​ time, Weston's equity beta will rise toward 0.64​, as the soft drink division has a higher growth rate and so will represent a larger fraction of the firm.

Answer 1

a)	Cost of Capital of Soft Drink Division
	= Rf + β(Rm-Rf)
	Where,
	Rf = Risk Free Rate = 4%
	β = Beta of Soft Drink Division = 0.64
	(Rm-Rf) = Market Risk Premium = 4%
	So,
	Cost of Capital of Soft Drink Division
	= Rf + β(Rm-Rf)
	= 4% + 0.64*4%
	= 4% + 2.56%
	= 6.56%
	Value of Soft Drink Division
	= Free Cash Flow / (Cost of Capital - Perpetual Growth Rate)
	= $68 million / (6.56% - 4%)
	= $68 million / 2.56%
	= $2656.25 million
	Cost of Capital of Chemicals Division
	= Rf + β(Rm-Rf)
	Where,
	Rf = Risk Free Rate = 4%
	β = Beta of Chemicals Division = 1.11
	(Rm-Rf) = Market Risk Premium = 4%
	So,
	Cost of Capital of Chemicals Division
	= Rf + β(Rm-Rf)
	= 4% + 1.11*4%
	= 4% + 4.44%
	= 8.44%
	Value of Chemicals Division
	= Free Cash Flow / (Cost of Capital - Perpetual Growth Rate)
	= $75 million / (8.44% - 3%)
	= $75 million / 5.44%
	= $1378.68 million
	Total Value of Weston Enterprises
	= Value of Soft Drink Division + Value of Chemicals Division
	= $2656.25 million + $1378.68 million
	= $4034.93 million
b)	Weston's Current equity beta will be weighted average beta of
	its 2 divisions.
	Weston's Current Beta
	= Beta of Soft Drink Division*(Value of Soft Drink Division/Total Value)
	+ Beta of Chemicals Division*(Value of Chemicals Division/Total Value)
	= 0.64*($2656.25/$4034.93) + 1.11*($1378.68/4034.93)
	= 0.42 + 0.38
	= 0.80
c)	Weston's current cost of capital can be calculated using current
	equity beta.
	So,
	Weston's Current Cost of Capital
	= Rf + β(Rm-Rf)
	= 4% + 0.80*4%
	= 4% + 3.20%
	= 7.20%
			jeff jeffy Next > < Previous Related Solutions Weston Enterprises is an​ all-equity firm with two divisions. The soft drink division has an asset... Weston Enterprises is an​ all-equity firm with two divisions. The soft drink division has an asset beta of 0.64​, expects to generate free cash flow of $67 million this​ year, and anticipates a 3% perpetual growth rate. The industrial chemicals division has an asset beta of 1.07​, expects to generate free cash flow of $47 million this​ year, and anticipates a 2% perpetual growth rate. Suppose the​ risk-free rate is 2% and the market risk premium is 6%. b. Estimate​... Weston Enterprises is an​ all-equity firm with two divisions. The soft drink division has an asset... 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... A multinational company has many divisions. Two of these divisions are Mic Division and Mandy Division.... A multinational company has many divisions. Two of these divisions are Mic Division and Mandy Division. The Mic Division produces a component that is used by the Mandy Division. The cost of manufacturing the component is as follows: Direct materials $10 Direct labour $6 Variable overhead $4 Fixed overhead $5* Total cost $25 *Based on a normal volume of 400,000 components Other costs incurred by the Mic Division are as follows: Fixed selling and administrative: $400,000 Variable selling: $1.50 per... 5. Johnson Corp. has two divisions, Division A and Division B. Division B has asked Division... 5. Johnson Corp. has two divisions, Division A and Division B. Division B has asked Division A to supply it with 5,000 units of part WD26 this year to use in one of its products. Division A has the capacity to produce 25,000 units of part WD26 per year. Division A expects to sell 21,000 units of part WD26 to outside customers this year at a price of $20.00 per unit. To fill the order from Division B, Division A... A corporation has two divisions, the Parts Division and the Appliance Division. The Appliance Division currently... A corporation has two divisions, the Parts Division and the Appliance Division. The Appliance Division currently buys its switches from an outside supplier for $25 each. It needs 4,000 switches a year. The Parts Division makes switches, and has recorded the following information: Parts Division – Outside sale of switches: Price $27 Direct materials $10 Direct labor $ 2 Variable overhead $ 4 Fixed overhead $ 4 The Appliance Division wants to buy the 4,000 switches from the Parts Division.... Rockwood Enterprises is currently an all equity firm and has just announced plans to expand their... Rockwood Enterprises is currently an all equity firm and has just announced plans to expand their current business. In order to fund this expansion, Rockwood will need toraise $100 million in new capital. After the expansion, Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity. Rockwood has already announced the planned expansion, but has not yet determined how best to fund the expansion. Rockwood currently has 16 million shares outstanding and following... You work for a soft-drink company in the quality control division. You are interested in the... You work for a soft-drink company in the quality control division. You are interested in the standard deviation of one of your production lines as a measure of consistency. The product is intended to have a mean of 12 ounces, and your team would like the standard deviation to be as low as possible. You gather a random sample of 16 containers. Estimate the population standard deviation at a 80% level of confidence. 12.09 12.1 12.01 11.9 12.24 12.06 12.06... You work for a soft-drink company in the quality control division. You are interested in the... You work for a soft-drink company in the quality control division. You are interested in the standard deviation of one of your production lines as a measure of consistency. The product is intended to have a mean of 12 ounces, and your team would like the standard deviation to be as low as possible. You gather a random sample of 17 containers. Estimate the population standard deviation at a 98% level of confidence. 11.83 12.12 12.13 11.96 12.15 11.86 12.02... Alex Ltd, has two divisions, a Parts Division and Marketing Division. Each division operates as a... Alex Ltd, has two divisions, a Parts Division and Marketing Division. Each division operates as a profit centre.   The Parts Division manufactures keyboards and is free to sell its product internally and externally. The Parts Division’s annual capacity is 45,000 units and its fixed cost is $720,000. Currently, sexternal sales represent 70% of the Parts Division’s production capacity. The selling price for a keyboard is $60, and the variable manufacturing cost is 60% of the selling price. Commissions is $... SPD Ltd has two divisions, Tomato Division and Canning Division. Tomato Division has an annual capacity... SPD Ltd has two divisions, Tomato Division and Canning Division. Tomato Division has an annual capacity of 10 000 units of Tomato paste concentrate. Canning Division's annual requirement of Tomato paste concentrate is 8000 units. SPD Ltd requires that divisions should purchase inputs internally where available and uses a cost-plus transfer price policy, where transfer price is set at variable cost plus 25 per cent. Therefore, Tomato Division always satisfies the demand of the Canning Division first, before selling the... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions In C++ Having call-by-reference allows one to use storeback parameters, i.e., parameters whose values are transmitted... You must evaluate a proposal to buy a new milling machine. The base price is $175,000,... “Triangle Guessing” game in Python The program accepts the lengths of three (3) sides of a... THIS PROGRAM HAS TO BE WRITTEN IN C Single function to perform the parity computation on... Consider a buffer system consisting of Benzoic acid (pKa = 4.20) and sodium benzoate, a) Would... Decision Variables S T Minimize 1.8S + 2.20T Subject to: Potassium 5S + 8T >= 200... A neurologist needs to counsel a stroke victim and her husband about possible outcomes, treatment options,... ADVERTISEMENT About @ 2020 WizEdu