Question

Based on the following information, please estimate the bottom-up beta for HPQ.

	Levered Beta	D/E	Tax Rate
High Tech Sector	1.32	35.11%	27%
HPQ		46.30%	24.06%

Answer 1

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Correct Answer: Bottom-Up beta of HPQ is 1.4205

Working:

For calculating  the bottom-up beta for HPQ,

We would first un lever the Beta of High Tech Sector with the provided D/E ration and Tax rate and Re-lever it according to the HPQ specific parameters.Levered Beta can be used using the formula,

Levered Beta = Unlevered Beta ( 1 + (1- tax rate) (D/E Ratio)

Now,

First Unlevering the HPQ Beta,

Parameters provided,

• Levered Beta of High tech sector = 1.32
• D/E of High tech sector = 35.11%
• Tax Rate of High tech sector = 27%

Substituting the Values

Levered Beta = Unlevered Beta ( 1 + (1- tax rate) (D/E Ratio)

1.32 = Unlevered Beta ( 1 + (1- 0.27) (0.3511)

1.32 = Unlevered Beta ( 1 + 0.73 (0.3511) )

1.32 = Unlevered Beta ( 1 + 0.2563 )

1.32 = Unlevered Beta ( 1.2563 )

1.32 / 1.2563 = Unlevered Beta

Unlevered Beta of HPQ Sector = 1.051

Now to find the bottom-up beta of HPQ, we need to re lever the above beta with the HPQ's D/E and Tax rate

Parameters provided,

• Unlevered Beta of High tech sector = 1.051 (Calculated Above)
• D/E of High tech sector = 46.30%
• Tax Rate of High tech sector = 24.06%

Substituting the Values

Levered Beta = Unlevered Beta ( 1 + (1- tax rate) (D/E Ratio)

Levered Beta = 1.051 ( 1 + (1- 0.2406) (0.4630))

Levered Beta = 1.051 ( 1 + (0.7594) (0.4630))

Levered Beta = 1.051 ( 1 + 0.3516)

Levered Beta = 1.051 ( 1.3516)

Levered Beta = 1.051 ( 1.3516)

Levered Beta of HPQ is 1.4205

Therefore, Bottom-Up beta of HPQ is 1.4205