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Please show formulas and calculations and not just results and numbers, and explain rationale for answers.

TRM has 2 operating divisions.TRM wants to estimate the cost of capital for each division and for the firm.Assume all debt is risk-free. Ignore taxes.The risk-free rate is 2.5% and the market risk premium is 10%.

Firm

Equity Beta

Debt Ratio = Debt/Value

Division’s % of overall Firm Value

Atlas Foods

.80

.40

40%

Lace Linen

1.50

.20

60%

1. Estimate the asset beta for each division and for the firm.The asset beta is a weighted average of the debt beta (which is 0) and the equity beta.

2. TRM’s management uses the firm’s overall asset beta in evaluating both divisions.Is this a good idea? Explain.

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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