are SOC Tools(SOC), which constitutes 40 percent of the assets of the firm, Digital Equipment (DE), whichconstitutes 25 percent of the assets and Foundry Equipment (FE), which constitutes theremaining 35 percent of the assets. The unlevered (asset) betas of the three divisions(defined as the beta of the division if it were independent and 100% equity financed) are?A,SOC = 1.5, ?A,DE =0.7 and ?A,FE = 0.5. FFM?s debt-to-equity ratio, B/S, is 3/7 and thecorporate tax rate, tc, is 34%. The expected return on the market portfolio, rm, is 13 %. FFMcan borrow at the risk free interest rate, rf, of 4%.1. What is the discount rate, rA, which FFM should use for assessing projects in the SOCTools division, the Digital Equipment division and the Foundry Equipment division?2. Calculate the expected return on the equity, rS, of FFM?3. FFM is thinking of acquiring TTT Corporation, which has 40 percent of its assets in theSOC Tools?s industry and 60 percent in the Foundry Equipment?s industry. What isFFM?s opportunity cost of capital, rwacc, of the TTT division, if FFM acquires TTT?sassets? Assume that FFM?s capital structure stays the same after the acquisition.
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