Question

Q1. You are trying to estimate a beta for Delta Trucking. The regression beta over the last 5 years is 0.848, but the firm operated just in the trucking business and had an average debt to equity ratio of 10% over the period. The stock price is currently $ 10 per share and there are 35 million shares outstanding, and the current market value of debt is $ 50 million. Delta is planning on borrowing $ 150 million and using $ 100 million to buy InfoPad Software, a small software firm with no debt and a beta of 1.30. It is also planning on using the remaining $ 50 million to pay a dividend to its stockholders. (Tax rate is 40%)

a. Estimate the unlevered beta for Delta Trucking, based upon the regression beta and the average debt to equity ratio over the last 5 years.

b. Estimate the new unlevered beta for Delta, if it acquires InfoPad Software.

c. Estimate a new levered beta for Delta assuming that it goes through with its plan to buy InfoPad and buy back stock.

Answer 1

A) Unlevered Beta = 0.80

B) The new unlevered beta if it acquires Infopad would be 0.80

C) New levered beta would be 1.24

Refer detailed calulations here.