You are analyzing the beta for Hewlett Packard and have broken down the company into four broad

Question:

You are analyzing the beta for Hewlett Packard and have broken down the company into four broad business groups, with market values and betas for each group.

a. Estimate the beta for Hewlett Packard as a company. Is this beta going to be equal to the beta estimated by regressing past returns on their stock against a market index. Why or why not?
b. If the Treasury bond rate is 7.5%, estimate the cost of equity for Hewlett Packard. Estimate the cost of equity for each division. Which cost of equity would you use to value the printer division?
c. Assume that HP divests itself of the main frame business and pays the cash out as a dividend. Estimate the beta for HP after the divestiture. (HP had $1 billion in debt outstanding.)

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...