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Last week, a group of investors formed the Harrington Holding Company. Harrington was formed by acquiring all of the assets of the Jamison Software Corporation for $8 million and all of the assets of InfoGenetics Biotech Inc. for $24 million. After these acquisitions the holding company was worth $32 million. The beta of the assets of Jamison Software is 0.9, and the beta of the assets of InfoGenetics is 1.6. The expected return on the market is 9%, and the risk-free rate is 3%. Assume perfect markets (no taxes or transaction costs), i.e. the CAPM and the Modigliani-Miller theorem are true.
a) What is the beta of the assets of the Harrington?
b) What is the expected return on the assets of Harrington?
c) What rate should be used as the discount rate to evaluate a new software project undertaken by the Jamison division?
d) Harrington is capitalized with 20% debt, and the remainder equity. The debt beta is 0.3. What is the expected return on the equity of Harrington Holding Company?
Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the f..
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