Assignment Task: Galaxy Enterprises has a market capitalization (market value of equity) of $420 billion. The company has no debt outstanding, a cash balance of $140 billion and is in two businesses, computers and entertainment, with the computer business having a value three times that of the entertainment business. The computer business has an unlevered beta of 1.50 and the entertainment business has an unlevered beta of 1.20. The effective tax rate is 30% and the marginal tax rate is 40%.
Required:
A) Estimate the beta for Galaxy's stock, given its current standing.
B) Assume that Galaxy is considering entering the television business. The median regression beta for companies in this business is 0.988, the median debt to equity ratio for these companies is 50% and the median cash as a percent of firm value is 5%. Estimate the business unlevered (pure play) beta of being in the television business. (The marginal tax rate for all firms is 40%).
C) Now assume that Galaxy plans to borrow $80 billion to augment their cash balance and do the following:
Invest $70 billion on the Galaxy-TV, a flat panel, high-resolution television, thus entering the television business.
Pay a special dividend of $100 billion. Estimate the beta of Galaxy's equity after this transaction.