Question
consider the following regression equation for Golden Books--- ReturnsGolden Books = - 1.31% + 0.85 (ReturnsS&P 500). Assume that the firm had an average debt
consider the following regression equation for Golden Books---
ReturnsGolden Books = - 1.31% + 0.85 (ReturnsS&P 500). Assume that the firm had an average debt to equity ratio of 50% during the three years of the regression, and that it was in only one business which is publishing.
The firm wants to add a new business to its operation with a new debt to equity ratio of 150%, and the firm expects that half its future revenues and earnings will come from children videos (the new business). The average beta of firms specializing in childrens videos is 1.10, and these firms have an average debt to equity ratio of 25%; they face an average tax rate of 40%. Estimate the beta for Golden Books, looking forward. (You can assume that Golden Books will also face a tax rate of 40%).
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