Companioni Computer Corporation (CCC), a producer of office equipment, currently has assets of $15 million and a beta of 1.4. The risk-free rate is 8 percent,
and the market risk premium is 5 percent. CCC would like to expand into
the risky home computer market. If the expansion is undertaken, CCC would
create a new division with $3.75 million in assets. The new division would have
a beta of 2.4.
a. What is CCC’s current required rate of return?
b. If the expansion is undertaken, what would be the firm’s new beta? What
is the new overall required rate of return, and what rate of return must the
home computer division produce to leave the new overall required rate
of return unchanged?