A conglomerate decides to diversify into genetic testing business. The investment will be financed with...
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Finance
A conglomerate decides to diversify into genetic testing business. The investment will be financed with 20% debt and 80% common stock. Risk-free rate is 6% and the market risk premium is 7%. To estimate the project cost of capital, you identified two publicly traded pure play firms (A and B) and collected their equity betas and capital structure ratios. Assume none of the firms has preferred equity in their capital structure. What is the estimate of equity beta to be used for this genetic testing project by the conglomerate?
|
| Company A | Company B |
| Stock beta | 1.1 | 1.3 |
| Leverage (Debt/TA) | 0.45 | 0.5 |
| 0.78 | ||
| 0.63 | ||
| 1.2 | ||
| 1.3 | ||
| 1.25 |
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