3. Choco Ltd, an all equity confectionery firm is about to engage in a major diversification into consumer electronic industry. Choco equity beta is 1.4, whilst the average equity beta of the electronic industry average is 1.5. Gearing in the electronic industry averages 35% debt and 65% equity. Corporate debt is risk free. Returns on the market are 20%, risk free return is 10% and corporate tax rate is 30%. Required What would be a suitable discount rate for the new investment if Choco Ltd were to finance the new project in each of the following ways? a. Entirely by equity b. By 40%debt and 60% equity c. Entirely debt
3. Choco Ltd, an all equity confectionery firm is about to engage in a major diversification into consumer electronic industry. Choco equity beta is 1.4, whilst the average equity beta of the electronic industry average is 1.5. Gearing in the electronic industry averages 35% debt and 65% equity. Corporate debt is risk free. Returns on the market are 20%, risk free return is 10% and corporate tax rate is 30%. Required What would be a suitable discount rate for the new investment if Choco Ltd were to finance the new project in each of the following ways? a. Entirely by equity b. By 40%debt and 60% equity c. Entirely debt
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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3. Choco Ltd, an all equity confectionery firm is about to engage in a major diversification into consumer electronic industry. Choco equity beta is 1.4, whilst the average equity beta of the electronic industry average is 1.5. Gearing in the electronic industry averages 35% debt and 65% equity. Corporate debt is risk free. Returns on the market are 20%, risk free return is 10% and corporate tax rate is 30%.
Required
What would be a suitable discount rate for the new investment if Choco Ltd were to finance the new project in each of the following ways?
a. Entirely by equity
b. By 40%debt and 60% equity
c. Entirely debt
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