Kent Co. is an all-equity firm with two divisions. The first division is involved in the construction business and constitutes 30% of the firm’s total assets. The second division produces computer hardware and constitutes the remaining 70% of the firm’s total assets. Kent’s equity beta is 1.8. You have found a pure play comparable company in the construction business, Avco Inc. Suppose that Avco is a perfect comparable, i.e., its business risk totally matches the risk of Kent Co.’s construction division. Avco is financed by 40% debt and 60% equity. Avco equity beta is 2 and its debt is riskless. The market risk premium is 5% and the risk-free rate is 2%.
