Estimate Pepsi current beta

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Question - You have run a regression of monthly returns on PepsiCo against returns on the S&P 500 over the last 5 years and arrived at the following result:

ReturnPepsiCo = 0.23% + 1.20 × ReturnS&P 500

You are given the following additional information:

The current market value of equity at Pepsi is $40 billion and the firm has $10 billion in debt outstanding.

During the last 5 years, Pepsi had an average market value debt to equity ratio of 10%. The firm's marginal tax rate is 40%.

(a) Estimate Pepsi's current beta.

(b) Now assume that Pepsi will be spinning off its bottling operations for $10 billion, borrowing an additional $2 billion and buying back $12 billion worth of stock. The unlevered beta of firms operating in the bottling sector is 1.35. Estimate Pepsi's new beta.

Reference no: EM132806083

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