Question

In: Finance

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

6. 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 1.6 $100 million

Software 2.00 $150 million

Computer Mainframes 1.2 $250 million

a. What is the beta of the equity of the firm?

b. If the risk free return is 5% and the spread between the return on all stocks is 5.5%, estimate the cost of equity for the software division?

c. What is the cost of equity for the entire firm?

d. Free cash flow to equity investors in the current year (FCFE) for the entire firm is $7.4 million and for the software division is $3.1 million. If the total firm and the software division are expected to grow at the same 8% rate into the foreseeable future, estimate the market value of the firm and of the software division.

Solutions

Expert Solution

1)

Total Firm value = Value of Personal computers + Value of Software + Value of Computer Mainframes
=100+150+250
=500
Weight of Personal computers = Value of Personal computers/Total Firm Value
= 100/500
=0.2
Weight of Software = Value of Software/Total Firm Value
= 150/500
=0.3
Weight of Computer Mainframes = Value of Computer Mainframes/Total Firm Value
= 250/500
=0.5
Beta of Firm = Weight of Personal computers*Beta of Personal computers+Weight of Software*Beta of Software+Weight of Computer Mainframes*Beta of Computer Mainframes
Beta of Firm = 1.6*0.2+2*0.3+1.2*0.5
Beta of Firm = 1.52

2)

As per CAPM
expected return = risk-free rate + beta * (Market risk premium)
Expected return% = 5 + 2 * (5.5)
Expected return% = 16

3)

As per CAPM
expected return = risk-free rate + beta * (Market risk premium)
Expected return% = 5 + 1.52 * (5.5)
Expected return% = 13.36

4)

a.

firm or enterprise value= recent FCF* (1 + growth rate )/(WACC - growth rate)
Firm/enterprise value = 7.4 * (1+0.08) / (0.1336 - 0.08)
Firm/enterprise value = 149.1 m

b.

Software division value= recent FCF* (1 + growth rate )/(WACC - growth rate)
value = 3.1 * (1+0.08) / (0.16 - 0.08)
value = 41.85 m

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

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?
You have been asked to estimate the value of a home for sale. The subject property...
You have been asked to estimate the value of a home for sale. The subject property has three bedrooms, one bathroom, and is in good condition. A highly comparable property just sold near the subject recently. You will use this recent sale as the comp to estimate value of of the subject property. The comp sold for $134,000. It has three bedrooms, two bathrooms, and is in good condition. Assume bedrooms are worth $5,000 and bathrooms are worth $3,000. What...
You have been asked to estimate the value of a home for sale. The subject property...
You have been asked to estimate the value of a home for sale. The subject property has three bedrooms, two bathrooms, and is in good condition. A highly comparable property just sold near the subject recently. The comp sold for $127,900. It has three bedrooms, one bathroom, and is in good condition. Assume bedrooms are worth $4,500 and bathrooms are worth $2,700. What is the indicated value of the subject based on the comparable sale? (please show all work below...
You have been asked to estimate the appropriate discount rate to use in the evaluation of...
You have been asked to estimate the appropriate discount rate to use in the evaluation of a new line of business. You have determined the market value of the firm’s target capital structure as follows: Source of Capital Market Value Bonds 350,000 Preferred Stock 200,000 Common Stock 450,000 To finance the new project, the company will sell: 12-year bonds with a $1,000 par value paying 8% per year (paid semiannually) at the market price of $980. Preferred stock paying a...
You have been asked to estimate the appropriate discount rate to use in the evaluation of...
You have been asked to estimate the appropriate discount rate to use in the evaluation of a new line of business. You have determined the market value of the firm’s target capital structure as follows: Source of Capital Market Value Bonds 350,000 Preferred Stock 200,000 Common Stock 450,000 To finance the new project, the company will sell: 12-year bonds with a $1,000 par value paying 8% per year (paid semiannually) at the market price of $980. Preferred stock paying a...
You have been asked to provide an estimate for the net operating income (NOI) of the...
You have been asked to provide an estimate for the net operating income (NOI) of the Shared Office Space Building. The building consists of 16 suites evenly distributed in 4 floors (4 suites per floor). Today, the offices in the first-floor lease for $2,100 per month, while the rest of the offices lease for $1,600 per month. The market study reveals that the average vacancy in the market is 8% per year; the expected operating expenses are 41% of the...
You work for a large retailer and have been asked to estimate the proportion of your...
You work for a large retailer and have been asked to estimate the proportion of your customers that are less than 30 years old. You have sampled a large number of stores and have found that of the 106 customers you have surveyed, 58 are less than 30 years old. Assuming your sample is valid, what is the upper bound of a 99% confidence interval for the population proportion of customers who are less than 30 years old? (Report your...
You have been asked to estimate the enterprise value of Dan Automotive as of today in...
You have been asked to estimate the enterprise value of Dan Automotive as of today in an effort to determine what price the firm might sell for if it were offered for sale on the open market. You have identified a public company, Kal Motors, which has business operations that are identical to those at Dan Auto. The income statements for Dan Auto and Kal Motors for their fiscal years that ended this December 31, 2017 are as follows: Financials...
You are working for an investment firm in the City of London and have been asked...
You are working for an investment firm in the City of London and have been asked to perform some analysis of the European-style call options of a company called Elevation Matters Plc (EM). The most recent closing share price for EM was £38. The risk-free rate is 3%. The time to expiry for the options is one year. The volatility (standard deviation) of EM’s shares is 25% and the company has decided not to pay any dividends this year. On...
You have been asked to value the shares of L Corp. You estimate that L's Net...
You have been asked to value the shares of L Corp. You estimate that L's Net Income will be $1 billion in the next 12 months (year 1). You further forecast that L's Net Income will increase by $100 million each year in years 2 to 4. Starting from year 5, you forecast that L's Net Income will grow by 4% per year forever. That is, Net Income in year 5 will be 4% higher than Net Income in year...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT