Question

Harrison​ Holdings, Inc.​ (HHI) is publicly​ traded, with a current share price of $31 per share. HHI has 28 million shares​ outstanding, as well as $65 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 $897 million, and an enterprise value of $1.03 billion. After a little research, you find that the average asset beta of other fast food restaurant chains is 0.76. 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 1.35. Given this​ information, find the following:

1. Find HHI's asset beta

2. Beta of HDG

3. Estimate the beta of​ HHI's investment in the hockey team.

Round all answers to four decimal points.

Answer 1

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Answer:

Harrison Holdings Equity = Share Price x Number of Shares Outstanding

                                     =$31 x 28 million

                                     =$868 million

Harrison Holdings Debt = $65 million

Therefore Asset Beta = 868/(868+65)x(1/0.76) + 65/(868+65)x0 = 1.2241

Hotdog Holding = 50% of $897 million =$0.50 x 897 =$448.50 million

Value of Hockey Team =$(868 + 65) - $448.50 = $484.50 million

Now,

Hotdog Equity Beta = 0.76

=> (897/1030)x + (1030-897)/1030 x 0 = 0.76

=> = 0.76/897x1030

=> = 0.8727

HHI asset beta = 1.2241

Beta of hockey team

=> (448.5/(448.5+484.5))*0.8727 + (484.5/(448.5+484.5))*beta of hockey = 1.5494