You have been hired to estimate the beta for HP and have broken the company down into 4 broad business groups. The market values and equity betas for each group are shown on the table below:
Division 's equity Market Value
Business Group Market Value Asset Beta Division Debt
(in $billions) (in $billions)
Mainframes $2.0 1.10 $0.75
Personal Computers $2.0 1.50 $0.50
Software $1.0 2.00 $1.00
Printers $3.0 1.00 $1.25
________________________________________________________________
(a) Estimate the equity beta for HP as a company.
(b) If the market risk premium is 5% and the T-Bond rate is 2%, determine how much of the return HP's shareholders' earn is due to business (asset) risk, and how much is due to financial risk.
(c) Assume you are HP's CEO. Outside investors would like to know what WACC (s) you use to evaluate each division's projects. Would you use one for each division, or one for the entire firm. Why? Please explain.