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part b

part b

Essentials Of Investments
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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part b 

You are analyzing the beta for FATUKA company into three broad business groups, with market values and betas for each group given below: which is 100% equity financed - and have broken down the Market Value of Business Group Beta Equity Personal $ 3.0 billion |1.50 Computers Software $ 2.0 billion 2.00 Printers $ 3.0 billion |1.00 (a) Estimate the beta for FATUKA as a company. Is this beta going to be equal to the beta estimated by regressing past returns on FATUKA stock against a broad market index. Why or Why not? (b) If the treasury bond rate is 5%, estimate the cost of equity for FATUKA assuming equity risk premium of 5.5%. Also estimate the cost of equity for each division. (c) The Finance department uses FATUKA’a cost of equity for capital budgeting purposes. How might this standard distort capital allocation across different business groups?
Transcribed Image Text:You are analyzing the beta for FATUKA company into three broad business groups, with market values and betas for each group given below: which is 100% equity financed - and have broken down the Market Value of Business Group Beta Equity Personal $ 3.0 billion |1.50 Computers Software $ 2.0 billion 2.00 Printers $ 3.0 billion |1.00 (a) Estimate the beta for FATUKA as a company. Is this beta going to be equal to the beta estimated by regressing past returns on FATUKA stock against a broad market index. Why or Why not? (b) If the treasury bond rate is 5%, estimate the cost of equity for FATUKA assuming equity risk premium of 5.5%. Also estimate the cost of equity for each division. (c) The Finance department uses FATUKA’a cost of equity for capital budgeting purposes. How might this standard distort capital allocation across different business groups?
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