Firm A has two divisions, drinks and gas. Each division contributes the same fraction of...
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Firm A has two divisions, drinks and gas. Each division contributes the same fraction of the firms assets. The firm has 30M of risk-free debt outstanding. The market value of its equity is 40M. The risk-free rate is 5% and the market risk premium is 9%. Firm 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 Firm C is a pure play in the drinks industry. Firm C is 100% equity financed and has an equity beta of 1.0. Calculate the expected return on equity for Firm A. For simplicity, assume that the corporate tax rate is zero.
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