Question

Disney wants to buy into the following new sectors: Disney wants to put 10% of its overall firm market value into a new casinos and 10% of its overall firm market value into a new Marijuana stores. Disney currently has a debt/equity ratio of .25. The casino and marijuana industry have the same debt/equity ratios of 1.5. The marginal corporate tax rate is 40% for all industries. A.Calculate new beta for Disney.

Levered betas

• Disney 1.00

•Casino industry 1.50

• Marijuana industry 2.00

B.If Disney decided to finance these new projects with a debt/equity ratio of 1.00, what would the new beta be?

Answer 1

A.

80% of Disney would still be in existing business with a levered beta of 1

10% will be in Casino with a beta of 1.5 (assuming it is financed by D/E of 1.5)

10% will be in marijuana with a beta of 2 (assuming it is financed by D/E of 1.5)

New beta of Disney = Weighted average beta

=0.8*1+0.1*1.5+0.1*2

=1.15

B. Unlevered Beta of Casino = Levered beta/(1+(1-t)*D/E) = 1.5/(1+0.6*1.5) =0.79

Unlevered Beta of Marijuana = Levered beta/(1+(1-t)*D/E) = 2/(1+0.6*1.5) =1.05

If financed with a D/E of 1

Levered Beta of Casino segment = Unlevered beta* (1+(1-t)*D/E) = 0.79*(1+0.6*1) = 1.263158

Levered Beta of Marijuana segment = Unlevered beta* (1+(1-t)*D/E) = 1.05*(1+0.6*1) = 1.684211

So, New Beta of Disney = weighted average Beta

=0.8*1+0.1*1.263158+0.1*1.684211

=1.0947