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10 January, 07:10

Miller Inc. has an overall beta of 0.79 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent?

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  1. 10 January, 07:57
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    Ra=21.5%

    Explanation:

    Ra=Rf + (Rm-Rf) * Ba

    Where Ra=?

    Rf=11.2%

    Rm-Rf=9.5%

    Ba=1.08

    Ra=11.2% + (9.5%) * 1.08

    Ra=11.2%+10.3%

    Ra=21.5%
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Home » Business » Miller Inc. has an overall beta of 0.79 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.
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