You have been asked to estimate the beta of a high-technology firm which has three divisions...

You have been asked to estimate the beta of a high-technology firm which has three divisions with the following characteristics

Division	Beta	Market Value
Personal Computers	1.60	$100 million
Software	2.00	$150 million
Computer Mainframes	1.20	$250 million

What is the beta of the equity of the firm?

Solutions

Expert Solution

Market Value of Personal Computers = $100 million
Market Value of Software = $150 million
Market Value of Computer Mainframes = $250 million

Market Value of Firm = Market Value of Personal Computers + Market Value of Software + Market Value of Computer Mainframes
Market Value of Firm = $100 million + $150 million + $250 million
Market Value of Firm = $500 million

Weight of Personal Computers = Market Value of Personal Computers / Market Value of Firm
Weight of Personal Computers = $100 million / $500 million
Weight of Personal Computers = 20%

Weight of Software = Market Value of Software / Market Value of Firm
Weight of Software = $150 million / $500 million
Weight of Software = 30%

Weight of Computer Mainframes = Market Value of Computer Mainframes / Market Value of Firm
Weight of Computer Mainframes = $250 million / $500 million
Weight of Computer Mainframes = 50%

Beta of Firm = Beta of Personal Computers * Weight of Personal Computers + Beta of Software * Weight of Software + Beta of Computer Mainframes * Weight of Computer Mainframes
Beta of Firm = 1.60 * 20% + 2.00 * 30% + 1.20 * 50%
Beta of Firm = 1.52

jeff jeffy answered 1 year ago

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