325.2

2.You work in finance at Starbucks. The executives want to expand into flavored teas in bottles. The beta for Starbucks is 1.3 and the beta for Snapple Teas is 1.5. The expected return on the market is 12% and the risk-free rate is 4%. What discount rate (opportunity cost of capital) should you apply to the bottled tea expansion and WHY? (2 pts)

Since Starbucks is planning on expanding into bottled teas, it needs to estimate the risk of the bottled tea business. The risk of Starbucks is the risk of the specialty coffee business, so using Starbucks' beta would be incorrect. Since Snapple operates the type of business Starbucks is thinking of investing in, Snapple's beta is more appropriate. Using Snapple's beta, we can estimate the correct discount rate for that level of risk by using the CAPM. The answer we get is 16%.

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