Question
Southwestern Bell, a phone company, is considering expanding its operations into the media business. The beta for the company is 0.90, and the debt/equity ratio
Southwestern Bell, a phone company, is considering expanding its operations into the media business. The beta for the company is 0.90, and the debt/equity ratio is 1. The media business is expected to be 30 percent of the overall firm value. The average beta of comparable firms is 1.20; the average debt/equity ratio for these firms is 50 percent. The marginal corporate tax rate is 36 percent. (PLEASE SHOW WORK)
1. Unlevered beta of the media business is closest to
a. 0.66
b. 1.20
c. 0.91
d. 0.55
2. Unlevered beta of Southwestern Bell in its current form (i.e., before changes) is closest to
a. 0.55
b. 0.91
c. 0.90
d. 1.20
3. Unlevered beta of Southwestern Bell after expansion is closest to
a. 0.55
b. 0.91
c. 0.66
d. 0.70
4. Levered beta of Southwestern Bell after expansion is closest to
a. 0.90
b. 1.20
c. 0.91
d. 1.08
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