Question

Apple Computer has a market capitalization (market value of equity) of $420 billion.
The company has no debt outstanding, a cash balance of $140 billion and is in two
businesses, computers and entertainment, with the computer business having a value
three times that of the entertainment business. The computer business has an
unlevered beta of 1.50 and the entertainment business has an unlevered beta of 1.20.
a. Estimate the beta for Apple’s stock, given its current standing. (1 point)
b. Assume that Apple is considering entering the television business. The median
regression beta for companies in this business is 0.988, the median debt to
equity ratio for these companies is 50% and the median cash as a percent
of firm value is 5%. Estimate the unlevered beta of being in the television
business. (The marginal tax rate for all firms is 40%) (1 point)
c. Now assume that Apple plans to borrow $80 billion to augment their cash
balance and do the following:
? Invest $ 70 billion on the iTV, a flat panel, high-resolution
television, thus entering the television business.
? Pay a special dividend of $100 billion
Estimate the beta of Apple’s equity after this transaction. (The marginal tax
rate is 40%) (3 points)

Answer 1

(a) 0.95

(b) 0.80

(c) 1.308125

The value of Apple computer is $420 billion

The value of Apple excluding cash balance of $140 billion is $280 billion

Computer business has a value three times that of the entertainment business.

So $210 billion is Computer business and $70 billion is entertainment business

Computers business beta = 1.50

Entertainment business beta = 1.20

Cash beta = 0

Unlevered beta = 1.5(210/420)+ 1.20(70/420)+0(140/420)

= 0.95

(b)

Substituting the values we get

=0.76

Median unlevered beta of companies is 0.76

But cash is 5% of value( beta =0) and business is only 95%( beta =0)

Let the unlevered beta of TV business be 'B'

So,

0.76 = BX0.95 + 0X0.05

B = 0.76/0.95

= 0.8

Unlevered beta of TV business is 0.8

(c)

After raising $80 billion debt, cash will become $220 billion

$70 billion is put in TV business(beta =0.8) and $100 billion is paid as dividend, So final cash balance will be $50 billion

Total assets of the company will be = 210 + 70 + 70 + 50

= $ 400 billion

So unlevered beta will be = 1.5(210/400)+1.20(70/400)+0.80(70/400)+0(50/400)

= 1.1375

Debt = $80 billion, Equity = $400 - $80 = $320 billion

Substituting we get levered beta = 1.308125