Last week, a group of investors formed the Harrington Holding Company. Harrington was formed by acquiring all of the assets of the Jamison Software Corporation for $8 million and all of the assets of InfoGenetics Biotech Inc. for $24 million. After these acquisitions the holding company was worth $32 million. The beta of the assets of Jamison Software is 0.9, and the beta of the assets of InfoGenetics is 1.6. The expected return on the market is 9%, and the risk-free rate is 3%. Assume perfect markets (no taxes or transaction costs), i.e. the CAPM and the Modigliani-Miller theorem are true.

 

a) What is the beta of the assets of the Harrington?

b) What is the expected return on the assets of Harrington?

c) What rate should be used as the discount rate to evaluate a new software project undertaken by the Jamison division?

d) Harrington is capitalized with 20% debt, and the remainder equity. The debt beta is 0.3. What is the expected return on the equity of Harrington Holding Company?

Answer rating: 100% (QA)

SOLUTION a To find the beta of the assets of Harrington we need to calculate the weighted average beta of the two acquisitions where the weights are b... View the full answer