Question 2. Break-even quantity
Use the information on the table below to find the break-even quantity for a company that cultivates abalone for sale to local restaurants. Assume the company has a discount rate of 15%, and that the project has an initial investment of $840,000. Further assume that the equipment is depreciated using straight-line over the project’s 7 year life.
Sales price per abalone $35
Variable cost per abalone $6.10
Annual Fixed Costs $375,000
Tax Rate .35
You have been hired to estimate the beta for HP and have broken the company down into 4 broad business groups. The market values and equity betas for each group are shown on the table below:
Division‘s equity Market Value
Business Group Market Value Asset Beta Division Debt
(in $billions) (in $billions)
Mainframes $2.0 1.10 $0.75
Personal Computers $2.0 1.50 $0.50
Software $1.0 2.00 $1.00
Printers $3.0 1.00 $1.25
(a) Estimate the equity beta for HP as a company.
(b) If the market risk premium is 5% and the T-Bond rate is 2%, determine how much of the return HP’s shareholders’ earn is due to business (asset) risk, and how much is due to financial risk.
(c) Compute HP’s WACC
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