General Systems, a computer manufacturer, announces that it will be acquiring FastWorks Software. You know the following: - General Systems had a beta of 1.25 before the merger. The firm has a market value of equity of $15 billion and $4 billion in debt outstanding. - FastWorks Software had a beta of 1.4 before the merger. The firm has a market value of equity of $6 billion and $2 billion in debt outstanding. Both firms have a 40% tax rate. Estimate the business risk (unlevered beta) for General Systems before acquisition. Estimate the business risk (unlevered beta) for FastWorks Software before acquisition. Estimate the business risk (unlevered beta) for the combined firm (after the acquisition). If General Systems acquired FastWorks Software by issuing 40% debt and 60% equity capital. Estimate the levered beta for the combined firm.
General Systems, a computer manufacturer, announces that it will be acquiring FastWorks Software. You know the following: - General Systems had a beta of 1.25 before the merger. The firm has a market value of equity of $15 billion and $4 billion in debt outstanding. - FastWorks Software had a beta of 1.4 before the merger. The firm has a market value of equity of $6 billion and $2 billion in debt outstanding. Both firms have a 40% tax rate. Estimate the business risk (unlevered beta) for General Systems before acquisition. Estimate the business risk (unlevered beta) for FastWorks Software before acquisition. Estimate the business risk (unlevered beta) for the combined firm (after the acquisition). If General Systems acquired FastWorks Software by issuing 40% debt and 60% equity capital. Estimate the levered beta for the combined firm.
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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Transcribed Image Text:General Systems, a computer manufacturer, announces that it will be acquiring FastWorks
Software. You know the following:
- General Systems had a beta of 1.25 before the merger. The firm has a market value of equity
of $15 billion and $4 billion in debt outstanding.
- FastWorks Software had a beta of 1.4 before the merger. The firm has a market value of equity
of $6 billion and $2 billion in debt outstanding.
Both firms have a 40% tax rate.
Estimate the business risk (unlevered beta) for General Systems before acquisition.
Estimate the business risk (unlevered beta) for FastWorks Software before acquisition.
Estimate the business risk (unlevered beta) for the combined firm (after the acquisition).
If General Systems acquired FastWorks Software by issuing 40% debt and 60% equity capital.
Estimate the levered beta for the combined firm.
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Step 1: Define the interpretation of Levered and Unlevered beta
VIEWStep 2: Calculation of Unlevered beta for GS before acquisition
VIEWStep 3: Calculation of Unlevered beta for FWS before acquisition
VIEWStep 4: Calculation of Unlevered Beta of the combined firm
VIEWStep 5: Calculation of Levered beta of the combined firm
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