Amalgamated Products has two operating divisions, foods and electronics. Each division accounts for the same fraction of the firm’s assets.
The firm has 20M of risk-free debt outstanding.
The market value of its equity is 30M.
The risk-free rate is 4% and the market risk premium is () is 8%.
There are no corporate taxes.
Another firm, Celec Inc., is a pure play in the electronics industry. The market value of Celec’s equity accounts for half of its total value. Celec’s equity beta is 2.9 and its debt beta is 0.1.
Finally, a third firm, Doof, is a pure play in the food industry. Doof is 100% equity financed and has an equity beta of 1.0.
Calculate the expected return on equity for Amalgamated Products.