Question

You have just run a regression of monthly returns on MAD, a newspaper and magazine publisher, against returns on the S&P 500, and arrived at the following result.

                                        Intercept: -0.005% ; Slope: 1.950; R2: 45. 0%.

You now realize that MAD went through a major restructuring at the end of last month (which was the last month of your regression), and made the following changes.

• The firm sold off its magazine division, which had an unlevered beta of 0.55, for 39 million.

• It borrowed an additional 18 million and bought back stock worth 57 million. After the sale of the division and the share repurchase, MAD had 43 million in debt and 148 million in equity outstanding. If the firm’s tax rate is 40.00% percent, re-estimate the beta after these changes.

1.  The value of equity before the sale of the division and stock buyback is equal to: (please enter your numbers in millions (i.e., 100 million is 100, not 100,000,000):

2. The value of debt before the sale of the division and stock buyback is equal to:

3. The unlevered beta of the firm prior to the sale of the division and stock buyback is equal to:

4. The weight (proportion of selling unit divided by total firm value) of the selling unit is equal to (hint: please enter your answer in decimal format. i.e., 25% is 0.25):

5. The weight of the remaining unit is equal to:

6. The unlevered beta of the remaining unit is equal to:

7. The levered beta after the sale of the division and stock buyback is equal to:

Answer 1

301 o The value of equity before the sale of the division and stock boy back is equal to 1 (Please enter your norbers in rellous lice, 100m. Miou 5100, not 100,000,000) - E - current equity & Stock bought back asalte value os Magazine drvis ons , E = 148+57 +39 = $quu rillion (P18 enten zu4 in the ans box) The value of debt before the sale of - 2 the aseanal division and stock buy back borrowing to D = corrent debt incre rented zu3-18=825 Million (Please enter as in the . aus box ) The unlevered beta of the erre Parior to the sale of buy back the division and stock is ean al to unleverd beta = levered Beta [1+01 Ex{1- tax rate] Levered beta a slove of the regression like =1.950; D=25 (Past (2) alaove); E 2244 (Pantai) i above) i tax rate = 40%

Hence, unlevered beta a 1,950 (1425/4ux (1-40%)] = 1.8391 (Please do round it off ! . as for your requirereus) @ The weight (proportion of selling unit divided by total firm value) of the selling unit is equal to Chrut' Please enter your answer in dearal formad ie. 25% is 0.25) unst weight, we selling dinded by to tal sirn value 2 39 39 - 25 +44 luolo CD+E) The weight of the venarning unrd is equal 0.86 to lng.14 6 the renarling und The unlevered data of Es eaval toi IfB is the unleveed beta od The renaming onld then, unlevered beta of the whole terra wx onlored beta of the selling division +(1-w) XB or 1.839l = 0.1uroissto.868B Hence, the remaining unit =B=(13 Q1.8371- og 4X:55 8.86 ne onlevered beta of = 2.06

beter after the sale of The levered the divisione and stock boy back as caual to levered beta a unleverd seto xlit hew DLE x[ictax rate] = 2.06% (in de comment = 2.41