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Pharma Inc

Finance

Pharma Inc., a listed pharmaceutical company, has a total of $50 million (market value) of debt outstanding and its stock is traded at $200 million in the market. The beta for its equity is 0.8 and the beta for its debt is 0.2. Pharma Inc. is thinking of diversifying into other businesses and has just identified an acquisition target, Food Link. Food Link is currently privately held, with 1 million stock shares outstanding, held mostly by the founding family. It has a stable after tax earnings of $6.6 per share per year, which is all paid out as dividends. This situation is expected to continue forever. There is a listed company in the same food business, Food Connection, with the following information: E ($ million) D ($ million) BE BD Food Connection 180 120 0.80 0.30 Assume no corporate or personal taxes. Assume the CAPM holds. Let the risk-free rate be 3%, the market risk premium is 6%. a) (5 points) What is the required rate of return on Parma Inc.'s assets?

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