Cunningham Cuisine is an all-equity financed company operating in the culinary arts and family restaurant segments. Cunningham Cuisine has an equity value of $240 million. The culinary arts division is worth $80 million and has a beta of 3.0. The family restaurant division has a beta of 1.2. The risk free rate is 2% and the expected excess return on the market is 6%. Assume no taxes.
a. If the company has no debt, what is the beta of Cunningham cuisine’s equity?
b. If the company has no debt, what is the expected return on Cunningham Cuisine’s stock?
c. Cunningham Cuisine has decided to issue debt and use the proceeds to buy back some of its stock. As a result, Cunningham Cuisine will now be financed with a 25% debt to equity ratio and the beta of debt will be 0.35. What will be the expected return on the stock? (for part c, please assume that the total value of the company is still $200 million as in parts a and b).