Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Jill needs to determine a beta for a private company for its valuation. She found a public
comparable with a beta of 1.2. As of the valuation date, the public comparable has 40% of
debt and 60% equity. The private company is 20% funded by debt and 80% funded by equity.
Assume both companies' debt is high quality. In your written response, please start with
question numbers such as a) or b) before showing your work and answer to the question.
a) What is the unlevered or asset beta for the public company?
b) What is the levered beta or the estimated beta of the private company?
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