Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of

Question

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $38 per share. HHI has 21 million shares outstanding, as well as $61 million in debt. The founder of HHI, Harry Harrison, made his fortune in the fast food business. He sold off part of his fast food empire, and purchased a professional hockey team. HHI's only assets are the hockey team, together with 50% of the outstanding shares of Harry's Hotdogs restaurant chain. Harry's Hotdogs (HDG) has a market capitalization of $868 million, and an enterprise value of $1.09 billion. After a little research, you find that the average asset beta of other fast food restaurant chains is 0.78. You also find that the debt of HHI and HDG is highly rated, and so you decide to estimate the beta of both firms' debt as zero. Finally, you do a regression analysis on HHI's historical stock returns in comparison to the S&P 500, and estimate an equity beta of 1.34. Given this information, estimate the beta of HHI's investment in the hockey team.

1. HHI's Asset Beta is: ______ (Round to 2 decimal places)

2. The hotdog equity beta is: ______ (Round to 2 decimal places)

3. The value of hockey team is $_____ (Round to 2 decimal places)

4. The beta of HHI's investment in the hockey team is _____ (Round to 2 decimal places)

Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $38 per share. HHI has 21 million shares outstanding, as well as $61 million in debt. The founder of HHI, Harry Harrison, made his fortune in the fast food business. He sold off part of his fast food empire, and purchased a professional hockey team. HHI's only assets are the hockey team, together with 50% of the outstanding shares of Harry's Hotdogs restaurant chain. Harry's Hotdogs (HDG) has a market capitalization of $868 million, and an enterprise value of $1.09 billion. After a little research, you find that the average asset beta of other fast food restaurant chains is 0.78. You also find that the debt of HHI and HDG is highly rated, and so you decide to estimate the beta of both firms' debt as zero. Finally, you do a regression analysis on HHI's historical stock returns in comparison to the S&P 500, and estimate an equity beta of 1.34. Given this information, estimate the beta of HHI's investment in the hockey team.

1. HHI's Asset Beta is: ______ (Round to 2 decimal places)

2. The hotdog equity beta is: ______ (Round to 2 decimal places)

3. The value of hockey team is $_____ (Round to 2 decimal places)

4. The beta of HHI's investment in the hockey team is _____ (Round to 2 decimal places)

Explanation / Answer

Harrison HOldings equity value=21*38=798 million
Harrison HOldings debt value=61 million
Total value of Harrison HOldings=798+61=859 million
Harrison asset beta=798/859*1.34+61/859*0=1.2448428

Hotdogs equity value=868 million
Hotdogs total value=1.09 billion
Hotdogs debt value=1090-868=222 million

Harrison holdings of hotdogs=50%*868=434 million
Hence, value of Hockey team=859-434=425 million

Asset beta of other fast food companies=0.78
Hotdog asset beta=0.78
Hotdog asset beta is also equal to 868/1090*beta of equity+222/1090*0
So, 0.78=868/1090*beta of equity
=>beta of hotdog equity=0.78*1090/868=0.97949

Harrison asset beta is also equal to beta of hockey*425/859+0.97949*434/859
Hence,
1.2448428=beta of hockey*425/859+0.97949*434/859
=>beta of hockey=(1.2448428*859-0.97949*434)/425=1.5158148

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