A company is going to open a new division. The division will be financed with $1 million in debt and $3 million in equity. The tax rate is 15% for all firms. The risk-free rate is 1% and market portfolio return is 7%. The yield on the division's debt is 4%. The information on the relevant pure play companies is given below: Pure Play Firm Beta Debt/Equity

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
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Solve the below problem as soon as possible quickly.

A company is going to open a new division. The division
will be financed with $1 million in debt and $3 million in
equity. The tax rate is 15% for all firms. The risk-free rate
is 1% and market portfolio return is 7%. The yield on the
division's debt is 4%. The information on the relevant
pure play companies is given below:
Pure Play Firm
A
B
Beta
1.5
0.8
Debt/Equity
0.6
0.2
What is the project beta of the pure play firm A?
Transcribed Image Text:A company is going to open a new division. The division will be financed with $1 million in debt and $3 million in equity. The tax rate is 15% for all firms. The risk-free rate is 1% and market portfolio return is 7%. The yield on the division's debt is 4%. The information on the relevant pure play companies is given below: Pure Play Firm A B Beta 1.5 0.8 Debt/Equity 0.6 0.2 What is the project beta of the pure play firm A?
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