Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.65, expects to generate free cash flow of $48 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.08, expects to generate free cash flow of $43 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 3% and the market risk premium is 5%. a. Estimate the value of each division. b. Estimate Weston's current equity beta c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time?

Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.65, expects to generate free cash flow of $48 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.08, expects to generate free cash flow of $43 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 3% and the market risk premium is 5%. a. Estimate the value of each division. b. Estimate Weston's current equity beta c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 1P: Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1...

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Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.52, expects to generate free cash flow of $49 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.09, expects to generate free cash flow of $74 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 2% and the market risk premium is 5%. a. Estimate the value of each division. b. Estimate Weston's current equity beta c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time? *** a. Estimate the value of each division. The cost of capital for the soft drink division is%. (Round to two decimal places.)
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