Beauville Inc. is a small entertainment firm operating in US. It has 20 million shares outstanding, trading at $ 10 a share and $ 50 million in outstanding debt. The firm's only business is making movies, but it does have $25 million as a cash balance. The firm has a regression beta (actual levered beta) based upon two years of stock returns of 1.85. The unlevered beta, corrected for cash holdings, for firms in the movie business is 1.20. The corporate tax rate is 40%.

a.Estimate the bottom-up beta for Beauville.

b.The firm is considering borrowing $100 million and using the proceeds, in conjunction with the cash it has on hand, to enter the entertainment software business. The unlevered beta for firms in this business is 2.0. Estimate the new company's beta after the transaction