Question
In: Finance
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 agoRelated Solutions
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