You are analyzing the beta for Hewlett Packard and have broken down the company into four broad business groups, with market values and betas for each group.
Business Group Market Value of Equity Beta
Mainframes $ 2.0 billion 1.10 Personal
Computers $ 2.0 billion 1.50
Software $ 1.0 billion 2.00
Printers $ 3.0 billion 1.00
a. Estimate the beta for Hewlett Packard as a company. Is this beta going to be equal to the beta estimated by regressing past returns on HP stock against a market index. Why or Why not?
b. If the treasury bond rate is 7.5%, estimate the cost of equity for Hewlett Packard. Estimate the cost of equity for each division. Which cost of equity would you use to value the printer division?
c. Assume that HP divests itself of the mainframe business and pays the cash out as a dividend. Estimate the beta for HP after the divestiture. (HP had $ 1 billion in debt outstanding.)