Question

Harrison​ Holdings, Inc.​ (HHI) is publicly​ traded, with a current share price of $ 40 per share. HHI has 30 million shares​ outstanding, as well as $ 67 million in debt. The founder of​ HHI, Harry​ Harrison, made his fortune in the fast food business. He sold off part of his fast food​ empire, and purchased a professional hockey team.​ HHI's only assets are the hockey​ team, together with 50 % of the outstanding shares of​ Harry's Hotdogs restaurant chain.​ Harry's Hotdogs​ (HDG) has a market capitalization of $ 882 ​million, and an enterprise value of $ 1.02 billion. After a little​ research, you find that the average asset beta of other fast food restaurant chains is 0.73. You also find that the debt of HHI and HDG is highly​ rated, and so you decide to estimate the beta of both​ firms' debt as zero.​ Finally, you do a regression analysis on​ HHI's historical stock returns in comparison to the​ S&P 500, and estimate an equity beta of 1.32. Given this​ information, estimate the beta of​ HHI's investment in the hockey team.

What is HHI asset beta?

equity beta?

Value of Hockey Team?

Beta of Hockey Team

Answer 1

Value of Hockey team = (Value of HHI) - (50% of Value of HDG) = ($40/share * 30 mn shares + $67 mn debt) - (0.5 * $1.02bn) = $1.267 bn - $0.510 bn = $757 mn

(using Enterprise value in both cases. We subtract only 50% of the HDG value since HHI holds only 50% of HDG)

Share of hockey team in HHI = 757/1267 = 60%

Share of HDG value in HHI = 510/1267 = 40%

Beta of HHI = 60% of Beta of Hockey team + 40% of Beta of HDG

thus, Beta of Hockey team = (Beta of HHI - 40% of Beta of HDG)/60% = (1.32 - 0.4*.73)/.6 = 1.71

Equity beta of HHI = 1.32

Asset beta of HHI = unlevered beta = 1.32 /(1+67/1200) {Levered beta / (1 + debt / equity)= 1.25