Company A has two divisions, book and gas. Each division contributes the same fraction of...
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Company A has two divisions, book and gas. Each division contributes the same fraction of the firms assets. The firm has 20M of risk-free debt outstanding. The market value of its equity is 30M. The risk-free rate is 4% and the market risk premium is 8%. Company B is a pure play in the gas industry. Firm B's market value of equity accounts for half of its total value. Firm B's equity beta is 2.9 and its debt beta is 0.1 Company C is a pure play in the book industry. Firm C is 100% equity financed and has an equity beta of 1.0. Calculate the expected return on equity for Firm A. Assume that the corporate tax rate is zero.
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