Question

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $31 per share. HHI has 22 million shares outstanding, as well as $67 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 $872 million, and an enterprise value of $1.04 billion. After a little research, you find that the average asset beta of other fast food restaurant chains is 0.75 . 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 1.38. Given this information, estimate the beta of HHI's investment in the hockey team. HHI's asset beta is (Round to two decimal places.)

Answer 1

The beta of HHI's investment in the hockey team is estimated by calculating HHI's asset beta, which involves the equity beta and the relative weights of equity and debt, given the assumption that the beta of debt is zero.

Step-by-step explanation:

The beta of HHI's investment in the hockey team can be estimated using the asset beta, which incorporates both the equity beta and the lower risk of debt. Since we assume the Beta of debt to be zero, the asset beta is solely affected by the equity beta and the relative weights of equity and debt in the firm's capital structure. Using the provided data, HHI's market value of equity is $31 per share multiplied by 22 million shares, resulting in $682 million. With $67 million in debt, the total capitalization is $749 million. The equity weight is $682 million divided by $749 million (0.91), and the debt weight is $67 million divided by $749 million (0.09). Since the debt beta is zero, the asset beta formula simplifies to: Asset Beta = Equity Beta * Equity Weight, which results in an asset beta of 1.38 * 0.91.