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[Division cost of capital] The Oko-Cocoa Corporation's equity has a beta of 1.4. Its debt...

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Accounting

[Division cost of capital] The Oko-Cocoa Corporation's equity has a beta of 1.4. Its debt has a beta of 0.2. Its debt/equity (D/E) ratio is 0.3. The Johnson Corporation's equity has a beta of 2. The company has zero beta debt, and its debt/equity ratio is 0.5. The risk free rate is 8%, and the expected return on the market portfolio is 19%. There are no taxes. (a) The Johnson Corporation is thinking of investing in the same line of business that Oka-Cocoa is engaged in. What discount rate should it use? (b) Now suppose the Johnson Corporation has decided to invest in projects of this type. These projects now constitute 10% of the overall value of the Johnson Corporation. Given that its debt/equity ratio and the beta of its debt remain unchanged, what will the beta of Johnson's equity be now?

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