in the Excel file.
First we use historical beta to estimate the beta of Coca-Cola Amatil Limited. The conventional approach for estimating the beta of an investment is a regression of returns on the investment against returns on a market index. But we will further discuss bottom-up beta to make...
-diversified market portfolio
( The value of beta implies something about returns relative to the market
( The index used to approximate the market portfolio can affect the betaestimate
Risk recap
( Market risk
( Firm-specific risk
( Security’s total risk is market risk...
model asserts that the value of a stock is a function of the risk free rate, beta of a stock and stock market risk premium. Estimating risk free rate In developed economies the risk free rate is easy to estimate, it is treasury bill (bond) rate since it is assumed that government can never default- it...
Cascade had debt outstanding of $1.7 billion and a market value of equity of $1.5 billion; the corporate marginal tax rate was 36%.
a. Assuming that the current beta of 0.95 for the stock is a reasonable one, estimate the unlevered beta for the company.
b. How much of the risk in...
factors? How much of it is due to financial leverage?
The operating leverage is 0.51.So 51% of the risk for Boeing is due to business factors. 49% of Boeing is due to financial leverage.
2. Comparing to Sector Betas(Bottom-up Betas)
Break down your firm by business components, and estimate a...
Midland Energy Resources
1. For what purposes does Mortensen estimate Midland’s cost of capital? What would be the potential consequences of a too high estimate compared to the firm’s “true” cost of capital? What about a too low estimate?
Estimates of the cost of capital were used in many...
to 0.30. To get BetaE, the equity beta for Ameritrade, we would normally run a regression of equity returns on stock market returns. That is, we would estimate the slope of the line that best fits: Unfortunately, Ameritrade had their IPO (Initial Purchase Offer) in March of 1997, so there is not...
versus excess returns 7
4.1.4. Portfolio raw versus excess returns 9
4.2. Beta Stability of Portfolios 10
4.3. Descriptive Statistics for returns data 12
4.3.1. Measures of Central Tendency 13
4.3.2. Measures of Dispersion 13
4.4. Descriptive statistics of BetaEstimates 14
4.4.1...
example, a bank and a collection agency. Alternatively, you might choose Tyco and GE, which are both highly diversified companies. As such, they have less firm-specific risk than the typical stock.
6) BRIEFLY discuss the implication(s) of using historical return data to estimatebeta for a...
significant uncertainty because the estimates are based on the outlook of the future cash flows and condition of the market. The calculation of the CAPM model and WACC are especially sensitive to adjustments in beta. For example, J&J’s beta is currently estimated at 1.75. A beta of 1.5 gives us a...
relative to the market portfolio. In the APM and Multi-factor model, the betas of the asset relative to each factor have to be measured. There are three approaches available for estimating these parameters; one is to use historical data on market prices for individual assets; the second is to estimate the...
same risk free rate of each division is used to compute the corresponding divisional cost of equity.
Equity beta: since divisional cost of equity is asked to be estimated, the pure play method is applied here, assuming the industry average provides a fair estimate of divisional equity beta in...
of the SML method are (1) three parameters (the risk-free rate, the expected return on the market, and beta) must be estimated, and (2) the method essentially uses historical information to estimate these parameters. The risk-free rate is usually estimated to be the yield on very short maturity T...
data to compute the beta.
After computing equity beta, using the Debt-value ratio in Exhibit 4, unlever the equity beta, (i.e., compute the asset beta from equity beta).
5. Taking the average of the asset betas for the comparable firms, and use this as the estimate for the asset beta for...
and advertising, but is unsure of the appropriate cost of capital.
2
Introduction
Since the firm has been publicly traded for only a short time period, it does not have data to estimate its beta. Using the data provided in the case, we were asked to estimate the appropriate discount rate for...
.
So, the cost of capital of any investment opportunity equals the expected return of available investments with the same beta. This estimate is provided by the Security Market Line equation of the CAPM with states that, given the beta, of the investment opportunity, its cost of capital is
Ri=rf...
risk and return (including the CAPM and the APM) use past prices of an asset to estimate its risk parameters (beta(s)). Private firms and divisions of firms are not traded, and thus do not have past prices.
Solution 1: Estimate the beta, based upon comparable firms, and after adjusting for risk...
equity of $1.5 billion; the corporate marginal tax rate was 36%. a. Assuming that the current beta of 0.95 for the stock is a reasonable one, estimate the unlevered beta for the company. b. How much of the risk in the company can be attributed to business risk and much...
between systematic and unsystematic risk on security returns.
Difficulty: Easy
51. The Security Characteristic Line (SCL)
A. plots the excess return on a security as a function of the excess return on the market.
B. allows one to estimate the beta of the security.
C. allows one to estimate the...
conversations with practitioners at highly regarded
on advice from best-selling textbooks and trade books.
common theoretical frameworks to estimate the cost of
variation, however, for the joint choices of the risk-free rate
of return, beta and the equity market risk premium, as well
of implementation...