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You are considering investing in the fast-food industry. By looking at data on publicly traded...

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Accounting

You are considering investing in the fast-food industry. By looking at data on publicly traded fast-food companies, you find the following information for Big Pappa Fast Food and Finger Licking Fast Food:

The expected return on the market Portfolio 10%
Corporate Tax 34%
Equity (levered) beta for Big Pappa Fast Food 1
Equity (levered) beta for Finger Licking Fast Food 0.8
Debt-to-equity ratio for Big Pappa Fast Food 0.25
Debt-to-equity ratio for Finger Licking Fast Food 0.15
The risk free rate 5%
The expected return on the market Portfolio 10%
Corporate Tax 34%
Equity (levered) beta for Big Pappa Fast Food 1
Equity (levered) beta for Finger Licking Fast Food 0.8
Debt-to-equity ratio for Big Pappa Fast Food 0.25
Debt-to-equity ratio for Finger Licking Fast Food 0.15
The risk free rate 5%

(i) Calculate the asset beta for both Big Pappa Fast Food and Finger Licking Fast Food.

(ii) Show how the asset beta estimated can be used to calculate the discount rate for an investment in the fast food business.

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