Business, 21.02.2020 17:57, sophx

Kent Co. is an all-equity firm with two divisions. The first division is involved in the construction business and constitutes 30% of the firm’s total assets. The second division produces computer hardware and constitutes the remaining 70% of the firm’s total assets. Kent’s equity beta is 1.8. You have found a pure play comparable company in the construction business, Avco Inc. Suppose that Avco is a perfect comparable, i. e., its business risk totally matches the risk of Kent Co.’s construction division. Avco is financed by 40% debt and 60% equity. Avco equity beta is 2 and its debt is riskless. The market risk premium is 5% and the risk-free rate is 2%.

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Kent Co. is an all-equity firm with two divisions. The first division is involved in the constructio...