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Problem 1: Seacrest Corporation is a privately-owned chemical company, that is expected to generate a return on equity of 20% next period and is in stable growth, growing 4% a year in perpetuity. Publicly traded chemical companies in stable growth, growing 4% a year, have a return on equity of only 12% and trade at 1.6 times book value. If publicly traded chemical companies are fairly priced and we assume all the risk in a chemical company is market risk, estimate the beta for Seacrest. (The owner has his entire wealth invested in the company; the riskfree rate is 4% and the equity risk premium is 5%). PVB is price to book value multiple. Hint: PBV = (ROE-g) / (k-g)
a. 1.38
b. 1.28
c. 1.54
d. 1.00
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