Question

This Setup pertains to the next four questions: You are analyzing the beta of HP and have divided the company into four business groups. Currently HP has 4 billion of debt outstanding (assume equally distributed among divisions $1B each) and subject to %36 corporate tax; betas and market values for each group are: Unlevered Beta Market Value Business Group 0.74 2.25 Mainframes 1.4 2.25 Personal computers 2 Software 3.125 1.3 3.375 Printers 10) What is the unlevered beta of HP: 0.83 a b. 1 c. 1.29 d. 1.37 e. 1.42 11) What is the levered beta of HP: 1.1 a. b. 2.05 1.97 c. d. 2.51 2.11 e. nglish (US)

I'm having a hard time solving part 2 of this question, my exam is tomorrow :( pls help

Market value is in billion(11B) , total debt is 4 billion distributed 1 billion each group

Answer 1

Formula			MV - DV	Business group EV/Total EV		bu*[1 + (1-Tax rate)*DV/EV]
Business Group	Market value (MV)	Debt value (DV)	Equity value (EV)	Ratio of EV to Total EV	Unlevered beta (bu)
Mainframes	2.25	1	1.25	0.18	0.74	1.12
Personal computers	2.25	1	1.25	0.18	1.4	2.12
Software	3.125	1	2.125	0.30	2	2.60
Printers	3.375	1	2.375	0.34	1.3	1.65
Total	11		7

10). Unlevered beta for the company = sum of the weighted average betas of the business groups

= (0.18*0.74) + (0.18*1.4) + (0.30*2) + (0.34*1.3) = 1.43 (option e)

11). Levered beta for the company = unlevered beta*[1 + (1 - Tax rate)*Debt/Equity]

= 1.43*[ 1 + (1-36%)*4/7] = 1.95 (option c)

Note: There are slight differences between the computed answer and the given answer which can be because the given answers were calculated using whole numbers whereas the computed answer has been calculated using numbers given in billions.