Your bank, has been hired to estimate the cost of capital for a privately-held company that plans to invest in space travel.

You have identified three firms that you will use to estimate the appropriate cost of capital.SZ has two operating divisions, one for deep space exploration and one for recreational space travel.B has two operating divisions, one operating division does deep space exploration and one builds commercial aircraft.A has one operating division that builds commercial aircraft.In addition to operating divisions, some firms have excess cash in their treasury departments.

You have collected data on the systematic risk (Beta relative to the market portfolio) of the firm's debt and equity, as well as the debt and equity market values.

Company

Value of Debt (billions) Beta of Debt Value of Equity (Billions) Beta of equity

SZ $20 0.4 $30 1.2

B $250 0.2 $125 1.9

A $125 0.1 $300 1.2

a) (5 points) What are the firm betas for SZ, B, and A?

You know the following about the market values of the respective division of the firms.Assume that excess cash is invested in the riskless asset, which has a beta of zero.

Company Value of Excess Cash (billions) || Value of the Deep Space || Value of the Recreational Space || Value of the Comm. Aircraft

AZ $0 $25 $25

B $6 $69 $300

A $10 $415