Novus Nyet Company has two divisions: Health Foods and Specialty Metals. Each of these divisions employs debt equal to 30 percent of its total requirements, with equity capital used for the balance. The current borrowing rate is 8 percent, and the company's tax rate is 40 percent. Novus Nyet wishes to establish a minimum return standard for each division based on the risk of that division. This standard then would serve as the transfer price of capital to the division. The company has thought about using the capital asset pricing model in this regard. It has identified two samples of companies, with the following mode-value characteristics: Tax Rate Debt/Totat Beta Capitalization Ratio Health Foods 90 .50 .40 Specialty Metals 1.25 30 .40

Novus Nyet Company has two divisions: Health Foods and Specialty Metals. Each of these divisions employs debt equal to 30 percent of its total requirements, with equity capital used for the balance. The current borrowing rate is 8 percent, and the company's tax rate is 40 percent. Novus Nyet wishes to establish a minimum return standard for each division based on the risk of that division. This standard then would serve as the transfer price of capital to the division. The company has thought about using the capital asset pricing model in this regard. It has identified two samples of companies, with the following mode-value characteristics: Tax Rate Debt/Totat Beta Capitalization Ratio Health Foods 90 .50 .40 Specialty Metals 1.25 30 .40

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 5P

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