Decker\'s is an all-equity financed chain of retail furniture stores. Furniture

Question

Decker's is an all-equity financed chain of retail furniture stores. Furniture Fashions, a furniture maker, is the primary supplier to Decker's. Decker's has a beta of 1.54 as compared to Furniture Fashion's beta of 1.37. The risk-free rate of return is 2.6 percent and the market risk premium is 7.9 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

Decker's is an all-equity financed chain of retail furniture stores. Furniture Fashions, a furniture maker, is the primary supplier to Decker's. Decker's has a beta of 1.54 as compared to Furniture Fashion's beta of 1.37. The risk-free rate of return is 2.6 percent and the market risk premium is 7.9 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

Explanation / Answer

Expected return = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 2.6%+1.37×7.9%

= 13.42%

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