BUSINESS 100-You have been hired to estimate the beta

BUSINESS 100-You have been hired to estimate the beta

Question
You have been hired to estimate the beta for HP and have broken the company down into 4
broad
business groupsYou have been hired to estimate the beta for HP and have broken the company
down into 4 broad
business groups. The market values and equity betas for each group are shown on the table
below:
Business Group Division‘s equity
Market Value
(in $billions) Asset Beta Market Value
Division Debt
(in $billions) Mainframes
$2.0
1.10
$0.75
Personal Computers
$2.0
1.50
$0.50
Software
$1.0
2.00
$1.00
Printers
$3.0
1.00
$1.25
________________________________________________________________
(a) Estimate the equity beta for HP as a company.
(b) If the market risk premium is 5% and the T-Bond rate is 2%, determine how much of the
return
HP’s shareholders’ earn is due to business (asset) risk, and how much is due to financial risk.
(c) Assume you are HP’s CEO. Outside investors would like to know what WACC (s) you use to
evaluate each division’s projects. Would you use one for each division, or one for the entire firm.
Why? Please explain.

BUSINESS 100-You have been hired to estimate the beta

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