Division You have been asked to estimate the beta of a high-technology firm, which has three divisions with the following characteristics. Personal Computers Software Computer Mainframes a. b. C. d. Beta 1.6 2.00 1.2 Market Value $100 million $150 million $250 million What is the beta of the equity of the firm? 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? What is the cost of equity for the entire firm? 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.

Division You have been asked to estimate the beta of a high-technology firm, which has three divisions with the following characteristics. Personal Computers Software Computer Mainframes a. b. C. d. Beta 1.6 2.00 1.2 Market Value $100 million $150 million $250 million What is the beta of the equity of the firm? 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? What is the cost of equity for the entire firm? 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.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Hamada equation Original % debt in capital structure, wd Original % common equity in capital structure, wc Risk-free rate, TRF Market risk premium, RPM Tax rate, T Firm's cost of equity, rs Calculation of firm's current beta: Firm's current beta, b Calculation of firm's unlevered beta: Firm's unlevered beta, bu New % of debt in capital structure, Wd New New % of common equity in capital structure, Wc New Calculation of firm's new beta: Firm's new beta, bL New Calculation of firm's new cost of equity: Firm's new cost of equity, rs New 30.00% 70.00% 5.00% 7.00% 40.00% 14.00% 50.00% 50.00% Formulas #N/A #N/A #N/A #N/A
You forecast the company RIO will have a sustainable ROE of 15% in the future, similar to the industry average of 15%. The company has a dividend payout ratio of 50% versus industry average of 50%. The company had less debt and operation leverage compare to industry, as a result , RIO has a beta of 1.8 versus the industry average of 2. Based on these information, should the company RIO have a higher or lower PE ratio than the industry average ? Given a risk free rate of 2% and market risk premium of 8%, what is RIO’s “intrinsic” forward PE ratio based on formula?
Consider an economy with two types of companies, S and I. The profits of companies S always move together, but the profits of companies I move independently of each other. For both firms, there is a 70% probability that the firm's return is 30%, and a 30% probability that the return is -30%. The standard deviation of an individual company's return is closest to the value: Choose one: A.23.0% B.5.25% C.15.0% D.10.0% Only typed answer
Give typing answer with explanation and conclusion 1. If the value of sustainable investing is $171.1 and the discount rate is 8% while the value of non-sustainable investing is $15.7 and the company has a 28.7% probability of being sustainable. What is the expected value today of the company given a 18 year horizon? (Answer to 2 decimal places in $).
the first answer is still incorrect
A manager believes his firm will earn a return of 12.50 percent next year. His firm has a beta of 1.40, the expected return on the market is 10.50 percent, and the risk-free rate is 3.50 percent. Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.) Required return % Determine whether the manager is saying the firm is undervalued or overvalued. O overvalued O undervalued
ces A manager believes his firm will earn a return of 23.80 percent next year. His firm has a beta of 1.69, the expected return on the market is 16.30 percent, and the risk-free rate is 6.30 percent. Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.) Required return Determine whether the manager is saying the firm is undervalued or overvalued.. undervalued % overvalued
4. Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Hewlett Packard is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Hewlett Packard's beta is 1.25,the risk-free rate is 4.2%, its market value of equity is $67.3 billion, and it has $705 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 21% and you use a market risk premium of 5.9% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 11.3% and the computer sales division represents 35% of the value of your firm, what is an estimate of the WACC for your software division? Note: Assume that the firm will always be able to utilize its full interest tax shield. a. What is an estimate of the WACC for…
Please complete in Excel (and show work)
11. Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Hewlett Packard is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Hewlett Packard's beta is 1.18, the risk-free rate is 4.7%, its market value of equity is $67.6 billion, and it has $694 million worth of debt with a yield to maturity of 5.9%. Your tax rate is 25% and you use a market risk premium of 5.9% in your WACC estimates. **round to two decimal places** a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 12.9% and the computer sales division represents 36% of the value of your firm, what is an estimate of the WACC for your software division? Note: Assume that the firm will always be able to utilize its full interest tax shield.

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