Decker's is a chain of furniture retail stores

Finance Dec 02, 2020

Decker's is a chain of furniture retail stores. Furniture Fashions is a furniture maker and a supplier to Decker's. Decker's has a beta of 1.38 as compared to Furniture Fashion's beta of 1.12. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

Multiple Choice

12.46 percent

14.08 percent

14.54 percent

13.50 percent

12.92 percent

Expert Solution

The correct option is 12.46%

Explanation

Since company is going to make furniture, it should use the same beta as the maker of furniture which is 1.12

Cost of equity by the CAPM formula can be calculated as

= Risk free rate + Beta * Market risk premium

= 3.50% + 1.12*8%

= 3.50% + 8.96%

= 12.46%

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote