You Have Been Asked to Estimate the Beta of a High-Technology

question 5

Essay

You have been asked to estimate the beta of a high-technology firm, which has three divisions with the following characteristics.
$$\begin{array} { l l l } \text { Division } & \text { Beta } & \text { Narket Value } \\\text { Personal Computers } & 1.6 & \$ 100 \text { million } \\\text { Sofware } & 2.00 & \$ 150 \text { million } \\\text { Compute Nainframes } & 1.2 & \$ 250 \text { million }\end{array}$$
a. What is the beta of the equity of the firm?
b. If the risk free return is 5% and the spread between the return on all stocks is 5.5%, estimate the
cost of equity for the software division?
c. What is the cost of equity for the entire firm?
d. Free cash flow to equity investors in the current year (FCFE) for the entire firm is $7.4 million
and for the software division is $3.1 million. If the total firm and the software division are
expected to grow at the same 8% rate into the foreseeable future, estimate the market value of the
firm and of the software division.

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Definitions:

Generosity Error

A bias in rating where the evaluator tends to give higher ratings than deserved, often due to a desire to be seen as favorable or kind.

Inaccurately

Describes information, data, or results that are not correct or precise, often leading to errors in interpretation or conclusions.

Overall Impression

A general assessment or perception of something, typically considering all aspects or a comprehensive view.

Rating Scale

A tool used to capture responses or opinions by providing a set of categories that quantify characteristics, feelings, or attitudes.