Compute UA, the beta of the unlevered assets of the Hughes acquisition, by taking the average of the betas of the unlevered assets of Lockheed and Northrop.

In 1985, General Motors (GM) was evaluating the acquisition of Hughes Aircraft Corporation. Recognizing that the appropriate WACC for discounting the projected cash flows for Hughes was different from General Motors’
WACC, GM assumed that Hughes was of approximately the same risk as Lockheed or Northrop, which had low-risk defense contracts and products that were similar to those of Hughes. Specifically, assume the Hamada model of debt interest tax shields and the inputs in the table at right.AppendixLO1

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Comparison Firm BE DIE GM 1.20 .40 Lockheed .90 .90 Northrop .85 .70 Target E for acquisition of Hughes = 1 Hughes's expected unlevered cash flow next year $300 million Growth rate of cash flows for Hughes = 5% per year Marginal corporate tax rate = 34% Appropriate discount rate on debt: riskless rate = 8% Expected return of the tangency portfolio = 14%