ABC, which had a market value of equity of $2 billion and a β of 1.50, announced that it was acquiring XYZ, which had a market value of equity of $ 1 billion, and a β of 1.30. Neither firm had any debt in its financial structure at the time of the acquisition, and the corporate tax rate was 40%.
a. Estimate the β for ABC after the acquisition, assuming that the entire acquisition was financed with equity.
b. Assume that ABC had to borrow the $ 1 billion to acquire XYZ. Estimate the β after the acquisition.