Reference no: EM132887498

You are the CFO of the Fruit CompanyMilk CompanyMilk CompanyFruit Company, Milk Company and are considering a possible acquisition of the . The , as the name suggests, operates in the dairy industry which is different from your current business line. As the CFO of the you plan to finance the acquisition of the with 10% long-term debt.

To help guide your decision, you use data from the Cream Company, which is in the same product line (and risk class) as the Milk Company. Specifically, the Cream Company has an equity beta of 1.8 and has 25% long-term debt in its capital structure.

The Fruit Company has an equity beta of 0.9 and currently has 30% debt in its capital structure. The company has a risk-free cost of debt of 3%, and the expected rate of return on the market is 11%. The marginal tax rate for all firms is 40%.

Question 1: What is the unlevered equity beta of the Cream Company?

Question 2: What is the levered equity beta for the Milk Company? (Hint: account for the proposed capital structure)

Question 3: What is the WACC for the Milk Company? (Hint: remember, account for the proposed capital structure)