Intermountain Resources is a multidivisional company. It has three divisions wit

ID: 2707655 • Letter: I

Question

Intermountain Resources is a multidivisional company. It has three divisions with the following betas and proportion of the firms total assets:

Division Beta Proportion of Assets

Natural gas pipelines 0.70 50%

Oil and gas production 1.20 30

Oil and gas exploration 1.50 20

The risk free rate is 7% and the market risk premium is 8%.

a. What is the firms weighted average beta?

b. What required equity rate of return should the firm use for average-risk projects in its natural gas pipeline division?

c. What required equity rate of return should the firm use for average risk projects in its oil and gas exploration division?

PLEASE SHOW WORK! :)

weighted average beta=0.70*0.5+1.2*0.3+1.5*0.2=1.01

b. required rate of return=7%+(8*0.70)=12.6%

c. required rate of return=7%+(8*1.5)=19%

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