You’ve identified acomparable firm for a new division you are heading up.The comparable has an equity beta of 1.4 and its debt has a beta of 0.3. The equity of the comparable has a market value of $30B and has $4B in debt outstanding. Your firm is made up of $24B in equity and $8B in debt which has a beta of .18. The market risk premium is 8% and the risk-free rate is 3%. What is the appropriate discount rate to use for your division’s assets/projects?
Assume the comparable firm from the previous problem also had $2B in cash that you didn’t notice when doing problem #1. Now, what is the appropriate discount rate to use for your division’s assets/projects?
Please list the formula's used to find the solution.