What is the firm\'s asset beta? ( Hint: What is the beta of a portfolio of all t
ID: 2711238 • Letter: W
Question
What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 7% and a market risk premium of 8%. (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Nero Violins has the following capital structure:Explanation / Answer
a) (All figures in $ millions)
Total Market Value=Debt Value+ Preferred stock Value+Common stock Value=118+58+317=493
the firm's asset beta=(Debt Value/Total Market Value)*(Beta of Debt)+( Preferred stock Value/Total Market Value)*(Beta of Preferred stock)+(Common stock Value/Total Market Value)*(Beta of Common stock)
the firm's asset beta= (118/493)*(0)+(58/493)*(.38)+(317/493)*(1.38)
=0+.0447+.88734
=.932
b)CAPM, discount rate =risk-free interest rate + asset beta*(market risk premium)
discount rate =7% +.932*(8%)
discount rate =14.456 %
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