Question

Kent Co. is an​ all-equity firm with two divisions. The first division is involved in the construction business and constitutes​ 30% of the​ firm’s total assets. The second division produces computer hardware and constitutes the remaining​ 70% of the​ firm’s total assets.​ Kent’s equity beta is 1.8. You have found a pure play comparable company in the construction​ business, Avco Inc. Suppose that Avco is a perfect​ comparable, i.e., its business risk totally matches the risk of Kent​ Co.’s construction division. Avco is financed by​ 40% debt and​ 60% equity.​ Avco equity beta is 2 and its debt is riskless. The market risk premium is​ 5% and the​ risk-free rate is​ 2%.

Answer 1

A) 1.2

B) 10.15%

Step-by-step explanation:

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