Novell, which had a market value of equity of $2 billion and a beta of 1.50, announced that it was acquiring WordPerfect, which had a market value of equity of $1 billion and a beta of 1.30. Neither firm had any debt in its financial structure at the time of the acquisition, and the corporate tax rate was 40%.
a. Estimate the beta for Novell after the acquisition, assuming that the entire acquisition was financed with equity.
b. Assume that Novell had to borrow the $1 billion to acquire WordPerfect. Estimate the beta after the acquisition.