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    Beta Analysis for Hewlett Packard

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    8. 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 2.5%, 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.)

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    Solution Preview

    Please see attached file for response.

    8. 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
    Total $ 3.0 billion
    $8.0 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?
    Answer: Unlevered Beta = 2.0/8.0 x 1.10 + 2.0/8.0 x 1.50 + 1.0/8.0 x 2.00 + 3.0/8.0 x 1.00
    = 0.275 + 0.375 + 0.25 + 0.375 = ...

    Solution Summary

    Answer: Unlevered Beta = 2.0/8.0 x 1.10 + 2.0/8.0 x 1.50 + 1.0/8.

    $2.19