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BETA COEFFICIENTS Suppose Chance Chemical Company’s management conducted a study and concluded that if it expands its consumer products division (which is less risky than its primary business, industrial chemicals), its beta will decline from 1.2 to 0.9. However, consumer products have a somewhat lower profit margin, and this would cause its constant growth rate in earnings and dividends to fall from 6% to 4%. The following also apply: r M = 9%, r RF = 6%, and D o = $2.00. a. Should management expand the consumer products division? Explain. b. Assume all the facts given except the change in the beta coefficient. How low would the beta have to fall to cause the expansion to be a good one? (Hint Set P ^ 0 under the new policy equal to P ^ 0 , under the old one, and find the new beta that will produce this equality.)

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter 9.A, Problem 3P
Textbook Problem

BETA COEFFICIENTS Suppose Chance Chemical Company’s management conducted a study and concluded that if it expands its consumer products division (which is less risky than its primary business, industrial chemicals), its beta will decline from 1.2 to 0.9. However, consumer products have a somewhat lower profit margin, and this would cause its constant growth rate in earnings and dividends to fall from 6% to 4%. The following also apply: rM = 9%, rRF = 6%, and Do = $2.00.

  1. a. Should management expand the consumer products division? Explain.
  2. b. Assume all the facts given except the change in the beta coefficient. How low would the beta have to fall to cause the expansion to be a good one? (Hint Set P ^ 0 under the new policy equal to P ^ 0 , under the old one, and find the new beta that will produce this equality.)

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