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What is the expected equity beta after the dividend is paid

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Question - Firm Gamma has a market value of $1.7 billion and it is an all-equity firm. On its balance sheet it has $700m of cash. An analysis of the stock price indicates the firm has an equity beta of 2. In what follows, assume that that cash has a beta of zero.

Question-A: What is the enterprise value of firm Gamma?

Question-B: Suppose that the firm considers paying out all its cash in dividends. If nothing else changes, what is the expected equity beta after the dividend is paid?

Question-C: Instead of paying a dividend of $700m (as in (B) above), the firm is also considering the possibility of using $600m of its cash to acquire another all-equity firm with a beta of 3.0 and to retain $100m in cash. What would be the resulting firm's equity beta in this case?

Reference no: EM132961366

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