Proper Use of Betas

1.        c

2.        b

True or False Questions

3.        True

4.        False. The difference between CAPM and the build-up model is that CAPM incorjiorates beta and the build-up model does not.

5.        False

6.        False. You would unlever it for the private company, based on that company's capital structure

Fill-in-the-Blank Questions

7.        Industry's

8.        Business; financial (capital structure)

9.        Lower

 

10.     Vasicek Shrinkage Technique

11.     Excess; total; excess

12.     60; 36

13.     Levered

Exercises

14.   BL = Bv x (1 + (1 - r) x WJWe)

= 1.25 x (1 + (1 - 0.40) x 0.75/0.25) = 1.25 x(l +0.60x3) = 1.25 x (2.8) ^3.5

l + (l-t)WdiWe=-±-

(i-r)^/^=|^-i

Bu

1.40

0.60XW./W =------- 1

d      e     0.50

0.60 x Wd i We = 2.8 -1

Wd/We=3orD/E = 3orD = 3E

We also know that total capital equals $100 million so:

D + E = 8100,000,000 4£= $100,000,000 E = $25,000,000 D = 3H = $75,000,000

The estimated equity value for Company XYZ is $25 million.