Ans : Company A Company B Operating Leverage 2.4 2.14 Financial Leverage 1.11 1.07 Combined Leverage 2.66 2.29 2. You are analyzing the beta for ABC Computers Ltd and have divided the Company into four broad business groups, with market values and betas for each group. Business group Market value of equity Unleveraged beta Main frames Rs 100 billion 1.10 Personal Computers Rs 100 billion 1.50 Software Rs 50 billion 2.00 Printers Rs 150 billion 1.00 ABC Computers Ltd had Rs 50 billion in debt outstanding. Required: (i) Estimate the beta for ABC Computers Ltd as a company. Is this beta going to be equal to the beta estimated by regressing past returns on ABC Computers stock against a market index. Why or why not? (ii) If the Treasury bond’s rate is 7.5%, estimate the cost of equity for ABC Computers Ltd Estimate the cost of equity for each division. Which cost of equity would you use to value the printer division? The average market risk premium is 8.5%. (IPCC, Nov. 2004) Ans: (i) Beta = 1.275; Beta calculations will not be the same; (ii) ainframe
16.85%, Personal Computers 20.25%, Software 24.5%. Printers 16% To value printer division 16% rate is recommended.
3. The following summarizes the percentage changes in operating income, revenues, and betas for four pharmaceutical firms. Firm Change in revenue Change in