Arios Software is a small software company with 60 million shares outstanding, trading at $ 10 a share, and $ 400 million in debt. You have estimated a regression beta of 1.82 for the firm using the last 5 years of data, during which period the firm had an average debt to equity ratio of 50%. The tax rate for the company is 40%.

a. Assuming that the regression beta is correct, estimate the correct levered beta today, given the firms current debt to equity ratio.

b. Now assume that Arios Software is awarded a court judgment of $ 1 billion from Microsoft for violation of software copyrights. Arios plans to use this money to pay a dividend of $250 million, pay off $ 250 million of debt, and use the balance to invest in the computer hardware business. If the unlevered beta for computer hardware companies is 1.10, estimate the levered beta for Arios after these transactions.

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