Suppose that because of the large need for steel in building railroad infrastructure,Taggart Transcontinental and Rearden Metal decide to form into one large conglomerate.Your estimate of the asset beta for this new conglomerate is closest to:
A)0.42.
B)0.59.
C)0.66.
D)0.68.

Question

Quizplus · Accepted Answer

The asset beta for the new conglomerate can be estimated as a weighted average of the asset betas of Taggart Transcontinental and Rearden Metal, where the weights are based on the market values of the two companies. Assuming that both companies are of equal size, the asset beta for the new conglomerate would be (0.5 x 0.6) + (0.5 x 0.76) = 0.68. Therefore, the closest estimate is D) 0.68.

Suppose That Because of the Large Need for Steel in Building