Question

Harrison​ Holdings, Inc.​ (HHI) is publicly​ traded, with a current share price of $ 30 per share. HHI has 25 million shares​ outstanding, as well as $ 66 million in debt. The founder of​ HHI, Harry​ Harrison, made his fortune in the fast food business. He sold off part of his fast food​ empire, and purchased a professional hockey team.​ HHI's only assets are the hockey​ team, together with 50 % of the outstanding shares of​ Harry's Hotdogs restaurant chain.​ Harry's Hotdogs​ (HDG) has a market capitalization of $ 843 ​million, and an enterprise value of $ 1.09 billion. After a little​ research, you find that the average asset beta of other fast food restaurant chains is 0.74. You also find that the debt of HHI and HDG is highly​ rated, and so you decide to estimate the beta of both​ firms' debt as zero.​ Finally, you do a regression analysis on​ HHI's historical stock returns in comparison to the​ S&P 500, and estimate an equity beta of 1.36. Given this​ information, estimate the beta of​ HHI's investment in the hockey team.

Answer 1

Euity qBeta of Hotdog = 0.9

Answer:

Nos of Equity Share = 25 Million

Current Share Price 30

HHI Equity=25 × 30 = 750  

HHI Debt  = 66 Million

Beta of Equity of HHI = 1.36

Beta of debt of HHI  = 0

HHI Assets Beta   =    Equity Beta × Equity/(Equity + debt) + Debt

                                    Beta + Debt/(Equity + debt)

                             =     1.21

Holdings of hotdogs = 843/2= 421.5

Therefore Value of Hockey Team = (750 + 64) - 421.5= 392.5

Hotdog Equity beta = (843/1090) × Equity beta + (247/1090) × 0 = 0.74

Hotdog Equity beta = 0.96

HHI Assets Beta = 1.21

(421.5/(421.5 + 392.5)) 0.96 + (392.5/(421.5 + 392.5)) × Beta of Hockey team = 1.21

0.4971 + 0.4822 × Beta of Hockey team = 1.21

after solving Beta of Hockey team = 1.48