Answer Happy

Frederico Furniture Inc (FFI) is considering entering the patio furniture market with a new line of patio furniture made from recycled plastic. Your job is to determine if FFI should enter this new line of business. The new division would have a higher level of risk than the parent company due to the competitiveness of this market. You have been given the following information on the parent company (FFI), its new division, and the market: FFI: B = 0.5, D/E = 0.60, tax rate = 30%, R₁ = 7% ● Market information: Return on Government of Canada 3-month T-bills = 5%, Market risk premium is 5% FFI has identified a pure play company, Plastic Patios Inc (PPI), to use in its analysis of the new division. PPI: B = 1, WD = 40%, WE = 60%, tax rate = 40%, RD = 9% Determine the appropriate discount rate that FFI should use when evaluating projects for its new division. The new division will have the same capital structure, tax rate and cost of debt as the parent company, FFI.