part b You are analyzing the beta for FATUKAcompany into three broad business groups, with market values and betas for each group given below:which is 100% equity financed - and have broken down theMarket Value ofBusiness GroupBetaEquityPersonal$ 3.0 billion|1.50ComputersSoftware$ 2.0 billion2.00Printers$ 3.0 billion|1.00(a) Estimate the beta for FATUKA as a company. Is this beta going to be equal to the beta estimatedby 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 riskpremium 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 mightthis standard distort capital allocation across different business groups?

Beta is measure of risk of security against market and it indicates that how there is change in…

Answered: part b | bartleby

Business

Finance

part b

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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Question

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?

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