You Are a Financial Analyst for General Motors and Have

question 77

Essay

You are a financial analyst for General Motors and have been asked to evaluate the effect on risk of taking over RandomTech,an electronics firm.You have collected the following data for both firms:
$\begin{array} { lcc } &\underline{ \text { GM }} &\underline{ \text { RandomTech} } \\\text { share price } & \$ 60 & \$ 20 \\\text { number of shares } & 13.25 \text { million } & 10 \text { million } \\\text { beta } & 1.0 & 2.0 \\\text { standard deviation } & 20 \% & 80 \%\end{array}$

You estimate the correlation of returns between GM and RandomTech to be 0.3.
a. How will taking over RandomTech affect GM's beta?
b. What will the variance of the combined firm be if the takeover is carried through?

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A sum of money held in trust as protection against potential damage or default, typically paid by a tenant to a landlord.

Ordinary Wear

The natural and expected deterioration of an item over time due to normal and reasonable use.

Blatant Discrimination

Open, conspicuous, unashamed unfair treatment of individuals based on their race, gender, age, or other characteristics.

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A lease arrangement where either the tenant or the landlord can terminate the agreement at any time without cause.