7.19 You have been asked to estimate the beta of a high-technology firm that has three divisions with the characteristics shown in Table 7.9.

Division Beta Market value ($ million)
Personal computers 1.60 100 Software 2.00 150 Computer mainframes 1.20 250

a. What is the beta of the equity of the firm? Answer: 1.52

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. Answer: 16%

c. What is the cost of equity for the entire firm? Answer: 13.4%

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. Answer: PV (total firm) = $147.96; PV (software division) = $41.88