Question

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 1.34 as compared to Furniture Fashion's beta of 1.14. The risk-free rate of return is 3.6 percent and the market risk premium is 8 percent. Both firms are all equity financed. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

Answer 1

the discount rate is 12.72%

Step-by-step explanation:

The computation of the discount rate that should be used in the case when the project involves furniture manufacturing is shown below:

= risk-free rate of return + (beta of Furniture fashion × market risk premium)

= 3.60% + (1.14 × 8% )

= 3.60% + 9.12%

= 12.72%

Hence, the discount rate is 12.72%

Therefore we ignored the beta of decker supplier