Question

You are estimating a fundamental beta for a company with two divisions. Division A has LTM sales of $2,611.5 million and division B has LTM sales of $1,015.5 million. The average cash-adjusted unlevered beta for firms in a sector comparable to division A is 1.24 and the average cash-adjusted unlevered beta for firms in a sector comparable to division B is 0.97. The average enterprise value to sales multiple for firms in a sector comparable to division A is 2.84x and the average enterprise value to sales multiple for firms in a sector comparable to division B is 2.43x. The firm you are evaluating has a 20.6% debt financing (i.e., debt-to-enterprise value = 20.6%) and cash to enterprise value of 1.8%. Assume a 21% tax rate for both this firm and the sector averages. If you weight the division betas based on estimated enterprise value of each division, what is the firm’s fundamental equity beta?

Answer #1

Weighted average beta= 1.24+0.97/2=1.105

Weighted average D/E=20.6% or (.20)

tax bracket = 21% or (.21)

Bu=βL/1+(1−T)×D/E

Where D/E is the
average debt-to-equity ratio of the comparable companies, T is
the tax rate, *Bu* the unlevered beta,
and *BL*
the levered
beta.

Bu=1.105/1+(1−.21)×.20

Bu=1.105/1+(.79)×.20

Bu=1.105/1+(.158)

Bu=1.105/1.158

=.9542

Hence, we get the unlevered beta= .9542

In the final step, we need to re-lever the equity using the target debt-to-equity ratio of the private company, which equals .206.

βL=βU×[1+(1+T)×D/E]

=0.9542*(1+(1-.21)*0.206

=0.9542*(1+(.79)*0.206

=0.9542*(1+(0.16274)

=0.9542*(1.16274)

=1.1094

Therefore, firm’s fundamental equity beta =1.1094

Zeta Group Holdings (Zeta) has three divisions. You have been
asked to use valuation multiples of comparable companies to value
Zeta. You have collected the following information on Zeta’s
performance in each division for the most recent year.
Division
Sales
EBITDA
Pharmaceuticals
$ 1 billion
$ 300 million
Cosmetics
$ 400 million
$ 100 million
Medical Devices
$ 2 billion
$ 400 million
Zeta currently has $2 billion in debt outstanding and a cash
balance of $300 million. There are...

Your company has two divisions: One division sells software and
the other division sells computers through a direct sales channel,
primarily taking orders over the internet. You have decided that
Dell Computer is very similar to your computer division, in terms
of both risk and financing. You go online and find the following
information: Dell's beta is 1.18, the risk-free rate is 4.3 %,
its market value of equity is $ 65.6 billion, and it has $ 709
million worth...

Your company has two divisions: One division sells software and
the other division sells computers through a direct saleschannel,
primarily taking orders over the internet. You have decided that
Dell Computer is very similar to your computerdivision, in terms
of both risk and financing. You go online and find the following
information: Dell's beta is
1.16,
the risk-free rate is
4.6%,
its market value of equity is
$66.4
billion, and it has
$703
million worth of debt with a yield...

a. Gentle corporation has two divisions of equal size. Division
A has a beta of 0.93, division B has a beta of 1.57. The company
has no debt. The cost of capital for the entire corporation is 16%.
Which of the two divisions have a lower cost of capital?
Explain.
b. Barrack mining uses a cost of capital of 11 % to evaluate an
average risk project. It adds or subtracts 3% from its WACC to
adjust for risk. Currently...

Your company has two? divisions: One division sells software and
the other division sells computers through a direct sales? channel,
primarily taking orders over the internet. You have decided that
Dell Computer is very similar to your computer? division, in terms
of both risk and financing. You go online and find the following?
information: Dell's beta is 1.16, the? risk-free rate is 4.4%?, its
market value of equity is $65.8 billion, and it has $699 million
worth of debt with...

Your company has two divisions: One division sells software and
the other division sells computers through a direct sales channel,
primarily taking orders over the internet. You have decided that
Dell Computer is very similar to your computer division, in terms
of both risk and financing. You go online and find the following
information: Dell's beta is 1.22, the risk-free rate is 4.7%,
its market value of equity is $65.6 billion, and it has $694
million worth of debt with...

Your company has 2 divisions: One division sells software and
the other division sells computers through a direct sales channel,
primarily taking orders over the web. You have decided that Dell
Computer is very similar to your computer division, in terms of
both risk + financing. You go online and find the following info:
Dells beta is 1.21, the risk-free rate is 4.5%, its market value of
equity is $67 billion, and it has $700 million worth of debt with...

You run a regression of monthly returns of Mapco, an oil- and
gas-producing firm, on the S&P 500 Index and come up with the
following output for the period 1991 to 1995. Intercept of the
regression = 0.380%; X-coefficient of the regression =0.55;
Standard error of X-coefficient =0.2; R2=55.0% There are 18.00
million shares outstanding, and the current market price is
$6.00/share. The firm has $20.00million in debt outstanding. The
firm has a tax rate of 40.00% percent.
b. Assume...

You are estimating
the price/earnings multiple to use to value company A by looking at
the average price/earnings multiple of comparable firms. Suppose
the following are the price/earnings ratios of firms in the
industry:
Firm
Share Price
Total Earnings
Share outstanding
B
130
5,000,000
1,000,000
C
30
6,000,000
2,000,000
D
168
30,000,000
5,000,000
E
100
12,000,000
3,000,000
What is the average P/E ratio?
Would you use all the comparable firms in calculating the
average? Why or why not?
What assumptions...

You are trying to estimate the share price for A&T Inc. You
know that A&T will have EBITDA of $50million at the end of the
year. In addition, you know that A&T Inc. has $10 million in
outstanding debt, no excess cash, and 60 million outstanding
shares. You have collected the following information on publicly
traded comparable firms (see table below). Using the average
Enterprise Value to EBITDA ratio of comparable firms, what is the
best estimate of A&T's share...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 6 minutes ago

asked 8 minutes ago

asked 12 minutes ago

asked 12 minutes ago

asked 12 minutes ago

asked 12 minutes ago

asked 13 minutes ago

asked 13 minutes ago

asked 13 minutes ago

asked 17 minutes ago

asked 18 minutes ago