Sun State Mining Inc., an all-equity firm, is considering forming a new division that will increase the firm's assets by 50%. Sun State currently has a required return of 18%, U.S. Treasury bonds yield 7%, and the market risk premium is 5%. If Sun State wants to reduce its required return to 16%, what is the maximum beta coefficient the new division could have?
a. 2.2
b. 1.0
c. 1.8
d. 1.6
e. 2.0
I see you were trying to "cut and paste" something. Sorry but that seldom works here and you will have to type the rest of it out.
Sra
P.S. Please don't forget to tell us specifically HOW we may HELP you. We do not DO the work for you, want to see some effort on your part, so you DO and then we HELP.
To determine the maximum beta coefficient the new division could have, we need to use the following formula:
Beta = (Required Return - Risk-Free Rate) / Market Risk Premium
Given that Sun State currently has a required return of 18%, and it wants to reduce its required return to 16%, we can calculate the new beta coefficient.
Using the formula, we get:
New Beta = (0.16 - 0.07) / 0.05
= 0.09 / 0.05
= 1.8
Therefore, the maximum beta coefficient the new division could have is 1.8.
So, the correct answer is option c. 1.8.