Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 12, Problem 24P
Summary Introduction
To determine: The beta of H Company’s investment in the hockey team.
Introduction:
Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.
Investment refers to the act of purchasing financial assets with the expectation of a rise in the value of the asset.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $39 per share. HHI has 22 million shares outstanding, as well as $70 million in debt. The founder of HHI, Harry Harrison, made his fortune in the fast food business. He sold off part of his fast food empire,
and purchased a professional hockey team. HHI's only assets are the hockey team, together with 50% of the outstanding shares of Harry's Hotdogs resta t chain. Harry's Hotdogs (HDG) has a market capitalization of $833 million, and an enterprise value of $1.01 billion. After a
little research, you find that the average asset beta of other fast food restaurant chains is 0.74. You also find that the debt of HHI and HDG is highly rated, and so you decide to estimate the beta of both firms debt as zero. Finally, you do a regression analysis on HHI's historical
stock returns in comparison to the S&P 500, and estimate an equity beta of 1.32. Given this information, estimate the beta of HHI's investment in the…
Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $34 per share. HHI has 20 million shares outstanding, as well as $68 million in debt. The founder of HHI, Harry Harrison, made his fortune in the fast food business. He sold off part of his fast food empire, and purchased a professional hockey team. HHI's only assets are
the hockey team, together with 50% of the outstanding shares of Harry's Hotdogs restaurant chain. Harry's Hotdogs (HDG) has a market capitalization of $872 million, and an enterprise value of $1.04 billion. After a little research, you find that the average asset beta of other fast food restaurant chains is 0.76. You also find that the debt of HHIl and
HDG is highly rated, and so you decide to estimate the beta of both firms' debt as zero. Finally, you do a regression analysis on HHI's historical stock returns in comparison to the S&P 500, and estimate an equity beta of 1.32. Given this information, estimate the beta of HHI's investment in…
HighTech Inc. was a small company started by four entrepreneurs a few years ago. They each initially invested $160,000 and sold $1,000,000 in preferred shares to a wealthy private investor. The company did not earn much profit during its operations but was able to pay the promised annual dividend of $110,000 on the preferred shares. The company did successfully develop several patents, some of which it sold and some it still holds. The four shareholders are planning to sell the remaining patents and all other assets and wind up the company to allow them to move on to other ventures. A summary of the company’s statement of financial position is as follows:
Chapter 12 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
Knowledge Booster
Similar questions
- Mosel Wine Company is currently 100% family owned and has no debt. The family is considering for the company to (i) raise debt to buy‐out part of the family’s equity and (ii) go public to sell part of its equity to new equity/stockmarket investors, while (iii) maintaining ownership of $2 million in the company’s equity post IPO. Investment bankers estimate the total market value of the company to be $10 million at zero debt. The PV of tax‐shield benefits are estimated at 22% of the amount of debt borrowed and shown below together with the PV of bankruptcy costs: (all figures in $ millions) Value of debt raised Value of unlevered firm PV of tax shield benefits PV of bankruptcy costs 0 10 0 01 10 0,22 02 10 0,44 0,053 10 0,66 0,14 10 0,88 0,25 10 1,1 0,46 10 1,32 0,77 10 1,54 1,1(3a) What is the optimal debt level that will maximize the total levered firm value?arrow_forwardARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements.ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows: a) What is is the interest for the year 2017 b) what is the interest for the year 2018 c) what is the interest for the year 2019arrow_forwardIndigo Inc. is a large multinational corporation with a number of subsidiaries located in countries all over the world. One of Indigo's subsidiaries, Sweet Ltd., sold a piece of manufacturing equipment to another one of Indigo's subsidiaries, Pharoah Inc. Indigo owned 80% of Sweet and 65% of Pharoah. The equipment had been on Sweet's books at a carrying value of $128,000, and had a fair market value of $153,850. Pharoah paid $132,800 for the equipment. Both Sweet and Pharoah were in the business of selling manufactured products to their customers; the sale of the equipment was considered to be outside the normal course of both businesses. Identify what value should be used by both Sweet and Pharoah to record the sale/purchase of the equipment. Sweet to record the sale/purchase of the equipment at $4 Pharoah to record the sale/purchase of the equipment at 2$arrow_forward
- ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements. ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows: Year 2017 2018 2019 Overdraft ($'000) Trade creditors (S'000) Interest 1,167 1,133 50 567 400 733 The industry averages for firms similar to ARG Ine. are Net Profit 9% Creditor days 70 days Margin 15 times 85 days 75 days Current ratio Quick ratio Interest cover 21 times Stock days Debtor days 0.8 times DEBT/Equity ratio 40% (using Book value) Required: As the…arrow_forwardARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements.ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows: a) What is is the interest for the year 2017 b) what is the interest for the year 2018 c) what is the interest for the year 2019 THE INCOME STATEMENT AND BALANCE SHEET IS ATTACHEDarrow_forwardSkysong, Inc. owns 25% of the common shares of Concord Corporation The other 75% of the shares are owned by the Concord family. Skysong acquired the shares eight years ago through a financing transaction. Each year, Skysong has received a dividend from Concord. Concord has been in business for 60 years and continues to have strong operations and cash flows. Skysong must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Skysong must use a discounted cash flow model to determine fair value. Skysong management intends to hold the shares for 5 more years, at which time they will sell the shares to the Concord family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $82,500 for each of the five years, although there is a 20% chance that dividends could be $46,000 each year. The risk-free rate is 4% and the risk- adjusted rate is 6%. Click here to…arrow_forward
- A few years ago, Posey Ltd. acquired 90 percent of the common shares of Suba Co. In February 2000, Suba purchased goods for $12,000 and in April 20X0, sold them to Posey for $15,000. Suba's usual gross margin is 25 percent, but it gave Posey a discount, In July 20X0, Posey sold 60 percent of those goods to one of its customers for $12,000. The rest of the goods remain unsold at the end of the year. Both Posey and Suba have income tax rates of 40 percent. To calculate the income tax expense for the consolidated income statement, add together the income tax expense from Posey and Suba's separate-entity income statements and reduce by a net adjustment of a. $0. Ob. $384. Oc. $480. d. $600.arrow_forwardWilliams Industries has outstanding 30 million common shares, 20 million Class A shares, and 20 million Class B shares. Williams has the right but not the obligation to repurchase the Class A shares if a change in ownership of the voting common shares causes J. P. Williams, founder and CEO, to have less than 50% ownership. Williams has the unconditional obligation to repurchase the Class B shares upon the death of J. P. Williams.Required:Which, if any, of the shares should be reported in Williams’s balance sheet as liabilities? Explain.arrow_forwardStan Inc. is a publicly listed corporation. In 2015, it decided to go private by buying all its 5,000,000 outstanding shares at P5.80 per share. In 2016, it restructured the company by selling its low margin facilities (bowling and billiard centers) for P20,000,000 and concentrated in operating its golf course, tennis, and badminton centers. Within one year, the restructuring improved the compnay's earnings per share to P1.50. This made the company's management consider expanding its golf and tennis operations. Funds for the planned expansion can be raised by going public again and issue the 5,000,000 shares that it previously reacquired. The company's investment bankers said that the shares can be offered to the public at a Price Earnings Ratio of 4 times the present earnings per share of P1.50. At what price will the 5,000,000 shares be offered to the public?arrow_forward
- Williams Industries has outstanding 30 million common shares, 20 million Class A shares, and 20 million Class B shares. Williams has the right but not the obligation to repurchase the Class A shares if a change in ownership of the voting common shares causes J. P. Williams, founder and CEO, to have less than 50% ownership. Williams has the unconditional obligation to repurchase the Class B shares upon the death of J. P. Williams. Required: Which, if any, of the shares should be reported in Williams’ balance sheet as liabilities? Explain.arrow_forwardRecently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.a.Trueb.Falsearrow_forwardJoseph Johnson established JJ Inc. in 2013. When he established the corporation, he exchanged $10,000 cash for 100% of the common shares with a Paid-Up Capital amount of $10,000. Early in 2015, Joseph transferred additional assets to the corporation. The assets he transferred consisted of a car he has been using as his personal automobile with a fair market value of $14,890 (adjusted cost basis of $9,000) and cash in the amount of $8,000. In exchange for these assets, he received stock with a Paid-Up Capital amount of $34,000. What are the tax consequences to Joseph and to JJ Inc. of this 2015 transfer?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
