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.

More thematic eBooks are located at : capital gains tax