ORIE_451_Homework__9_2008 - ORIE 451/551 Homework #9 Due...

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ORIE 451/551 Homework #9 Due Friday, April 11, 2008 1. Sprouts and Steel Corp. has two divisions, health foods and specialty metals. Each division has 30% debt and 70% equity. While new projects will be funded with 100% equity, the debt to equity ratio will not change appreciably and can be assumed to remain constant. The corporation finds proxy companies to help it establish the required rate of return for each division. A company in the health food industry is located. It has a beta of 1.12 and a debt to equity ratio of 0.75. Also, a company in the metals industry is found. It has a beta of 1.41 and a debt to equity ratio of 0.48. Using CAPM, find the required rates of return for Sprouts and Steel’s two divisions. The market rate is assumed to be 13%, with a risk free rate of 6%. The tax rate is 40% for everybody. 2. Fargo Industries currently manufactures various machine parts, but the company is considering whether or not to build after-market shock absorbers and front forks for
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This note was uploaded on 04/06/2010 for the course ORIE 451 at Cornell University (Engineering School).

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ORIE_451_Homework__9_2008 - ORIE 451/551 Homework #9 Due...

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