Kareena Softwares, a technology firm, has three divisions with the following characteristics: Division Beta Market Value (in lakh) Personal computers 1.40 120 Software 1.90 160 Computer mainframes 1.00 260 Total 540 You

(i) Calculation of Beta of the firm Beta = (1.40 * 120 lakh / 540 lakh) + (1.90 * 160 lakh / 540 lakh) + (1.00 * 260 lakh / 540 lakh) = 0.31 + 0.56 + 0.48 = 1.35 (ii) What would happen to the beta of equity if the firm divested itself of its software business? If firm divests itself of software business and pays out cash in form of dividend: Remaining Market Value = 540 lakh - 160 lakh = 380 lakh Beta = (1.40 * 120 lakh / 380 lakh) + (1.00 * 260 lakh / 380 lakh) = 0.44 + 0.68 = 1.12 If they keep the cash in the firm then Beta = (1.40 * 120 lakh / 540 lakh) + (0 * 160 lakh / 540 lakh) + (1.00 * 260 lakh / 540 lakh) = 0.31 + 0 + 0.48 = 0.79 (iii) Beta for valuation of software business for divestiture To value the software business for the divestiture use 1.90, the beta for the software division.