You run a regression of monthly returns of Mapco, an oil-and gas-producing firm, on the S&P 500 Index and come up with the following output for the period 1991â€“1995.
Intercept of the regression = 0.06%
X-coefficient of the regression = 0.46
Standard error of X-coefficient = 0.20
R2 = 5%
There are 20 million shares outstanding, and the current market price is $2/share. The firm has $20 million in debt outstanding. (The firm has a tax rate of 36%.)
a. What would an investor in Mapcoâ€™s stock require as a return, if the Treasure bond rate is 6%?
b. What proportion of this firmâ€™s risk is diversifiable?
c. Assume now that Mapco has three divisions, of equal size (in market value terms). It plans to divest itself of one of the divisions for $20 million in cash and acquire another for $50 million (it will borrow $30 million to complete this acquisition). The division it is divesting is in a business line where the average unlevered beta is 0.20, and the division it is acquiring is in a business line where the average unlevered beta is 0.80. What will the beta of Mapco be after this acquisition?