5F.12
12. Let's say Nike wants to diversify its business. It is planning on buying Wild Oats Markets (the company that owns Oasis Grocery Markets). Nike is financed 34% with debt and 66% with equity. Wild Oats is financed 58% with debt and 42% with equity. Nike's equity beta is 1.20 and Wild Oats' beta is 0.97. They both have debt betas that are 0. The risk-free rate is 4% and the expected return on the market is 14%. What should be your discount rate for discounting the cash flows for the decision of whether to buy Wild Oats? Justify your choice. [8]