Question c

Question 7 (2017 $2 Q4) You have been asked to assess the cost of equity for Travepedia International, a publicly traded firm that operates in the entertainment and travel businesses. You have collected the following information on the value generated by Travepedia in each of the businesses and relevant sector information: Business Estimated Value Sector Median Regression Beta Unlevered Beta Entertainment $1.5 billion 1.5 1.2 Travel $1 billion 2 0.8 Travepedia has a book value for equity of $500 million and a book value of debt of $500 million as well; the latter is also the market value for debt. The effective tax rate is 30% and the marginal tax rate 15 40%. a) Estimate the unlevered beta for Travepedia International. b) Estimate the levered beta for Travepedia International. c) Assume that Travepedia plans to borrow $1 billion to use for two purposes: $500 million will be used to buy back stock and $500 million to expand the travel business. Estimate the levered beta after the transaction