You are interested in estimating a beta for Digital Universe Company. Since they are a privately held firm, you do not have access to the necessary data. If you want to estimate a beta for DUC, you will have to work with some comparable firm data. a)Calculate the unlevered betas for each of the four basic comparable firms shown below. (Hint: Be sure to adjust for the respective tax rates given.) b) Estimate an equally-weighted and sales-weighted average unlevered betas using the data from your answer above. c) Digital has a target capital structure of 10% debt and 90% equity as well as a 40% marginal tax rate. If you estimated an unlevered beta of 1.30, calculate the levered beta for Digital. d) The current appropriate risk-free rate is 6% and the return on the market is 13.5%. Further assume that you calculated the levered beta above as 1.29. Using the CAPM, estimate DE’s cost of equity. Be sure to state any additional assumptions.
You are interested in estimating a beta for Digital Universe Company. Since they are a privately held firm, you do not have access to the necessary data. If you want to estimate a beta for DUC, you will have to work with some comparable firm data. a)Calculate the unlevered betas for each of the four basic comparable firms shown below. (Hint: Be sure to adjust for the respective tax rates given.) b) Estimate an equally-weighted and sales-weighted average unlevered betas using the data from your answer above. c) Digital has a target capital structure of 10% debt and 90% equity as well as a 40% marginal tax rate. If you estimated an unlevered beta of 1.30, calculate the levered beta for Digital. d) The current appropriate risk-free rate is 6% and the return on the market is 13.5%. Further assume that you calculated the levered beta above as 1.29. Using the CAPM, estimate DE’s cost of equity. Be sure to state any additional assumptions.
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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- You are interested in estimating a beta for Digital Universe Company. Since they are a privately held firm, you do not have access to the necessary data. If you want to estimate a beta for DUC, you will have to work with some comparable firm data.
a)Calculate the unlevered betas for each of the four basic comparable firms shown below. (Hint: Be sure to adjust for the respective tax rates given.)
b) Estimate an equally-weighted and sales-weighted average unlevered betas using the data from your answer above.
c) Digital has a target capital structure of 10% debt and 90% equity as well as a 40% marginal tax rate. If you estimated an unlevered beta of 1.30, calculate the levered beta for Digital. d) The current appropriate risk-free rate is 6% and the return on the market is 13.5%. Further assume that you calculated the levered beta above as 1.29. Using theCAPM , estimate DE’scost of equity . Be sure to state any additional assumptions.
Transcribed Image Text:Comparable Firms
Sales
Levered
Total
Таx
(S Mill)
Beta
1.45
Debt Ratio
Rate
Judy in the Sky, Inc.
Yellow Submarine, Ltd.
Eleanor Rigby, Co.
Hold My Hand, LLC
54.86
22.0%
25%
312.29
1.33
27.0%
35%
18.90
1.12
32.0%
30%
75.35
1.23
45.0%
28%
461.40
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