Question

Harrison​ Holdings, Inc.​ (HHI) is publicly​ traded, with a current share price of $ 40 per share. HHI has 30 million shares​ outstanding, as well as $ 61 million in debt. The founder of​ HHI, Harry​ Harrison, made his fortune in the fast food business. He sold off part of his fast food​ empire, and purchased a professional hockey team.​ HHI's only assets are the hockey​ team, together with 50 % of the outstanding shares of​ Harry's Hotdogs restaurant chain.​ Harry's Hotdogs​ (HDG) has a market capitalization of $ 816 ​million, and an enterprise value of $ 1.08 billion. After a little​ research, you find that the average asset beta of other fast food restaurant chains is 0.74. You also find that the debt of HHI and HDG is highly​ rated, and so you decide to estimate the beta of both​ firms' debt as zero.​ Finally, you do a regression analysis on​ HHI's historical stock returns in comparison to the​ S&P 500, and estimate an equity beta of 1.37. Given this​ information, estimate the beta of​ HHI's investment in the hockey team.

Answer 1

HHI equity , e= current share price* shares outstanding = 40*30 million = $1200 million

HHI debt , d = $61 million

equity beta , b1 = 1.37

debt beta , b2 = 0

asset beta for HHI, a1 = [(e/(e+d))*b1] + [(d/(e+d))*b2] = [(1200/(1200+61))*1.37] + [(61/(1200+61))*0] = 1.303

holdings of Harry's Hotdog , h= 50% of market capitalization = 0.50 * 816 million = $408 million

value of hockey team, v1 = e + d - h = 1200 +61 - 408 = $853 million

market capitalization of HDG , m = $816 million

enterprise value , v = $1.08 billion = $1080 million

hotdogs restaurant equity beta = b3

average asset beta = 0.74

[(m/v)*b3] = 0.74

[(816/1080)*b3 = 0.74

b3 = 0.74*1080/816 = 0.9794 or 0.98

let the beta of HHI's investment in hockey team = c

((h/(h+v1))*b3) + ((v1/(v1+h))*c) = a1

((408/(408+853))*0.9794) + ((853/(853+408))*c) = 1.303

0.3168875 + (0.6764472*c) = 1.303

0.6764472*c = 1.303 - 0.3168875 = 0.9861125

c = 0.9861125/0.6764472 = 1.45778 or 1.46

beta of HHI investment in hockey team = c = 1.46