You have run a regression of monthly returns on PepsiCo against returns on the S&P 500 over the last 5 years and arrived at the following result:

eturn_PepsiCo = 0.23% + 1.20 eturn_{& 500}

You are given the following additional information:

• The current market value of equity at Pepsi is $40 billion and the firm has $10 billion in debt outstanding.
• During the last 5 years, Pepsi had an average market value debt to equity ratio of 10%.
• The firms marginal tax rate is 40%.

(a). Estimate Pepsis current beta.

(b). Now assume that Pepsi will be spinning off its bottling operations for $10 billion, borrowing an additional $2 billion and buying back $12 billion worth of stock. The unlevered beta of firms operating in the bottling sector is on average 1.35. Estimate Pepsis new beta.