Question

• In your view, what are the determinants of a company's beta?
• How would you estimate the cost of debt for a firm whose only debt issues are privately held by institutional investors? Does it make a difference if the company's debt is privately placed as opposed to being publicly traded?
• Why do we use an aftertax figure for cost of debt but not for cost of equity?
• What do we mean by market efficiency? In your opinion, are financial markets efficient?
• Does the success of Warren Buffet and Jim Simons invalidate the Efficient Market Hypothesis? Explain.
• Assume market efficiency. Suppose you just heard a press conference given by the FED chairperson indicating that the recession is over and the economy is again entering an expansion. After learning about this prediction, can you profit in the stock market?

Answer 1

1.Following are the Detreminants of beta:

i)Financial Leverage:Other things remaining equal,the greater the proportion of capital that firm raise from debt,the higher its equity beta will be.

ii)Nature of product and service offered by company:Other things remaining equal,the more discretionery the product or service,the higher the beta.

iii)Operating leverage(Fixed cost as a percentage of total costs):Other things remaining equal,the greater the proportion the costs that are fixed,the higher the beta of the company.