Quote = 8
Given Data:
Risk Free Rate for Treasury Bill 5.80%
Risk Free Rate for Treasury Bonds 6.40%
Market Risk Premium for Treasury Bill 8.76%
Market Risk Premium for Treasury Bonds 5.50%
Beta 0.95
Expected Return for Short Term Investors = Risk Free Rate + (Beta * Market Risk Premium)
Expected Return for Short Term Investors = 5.80% + (0.95 * 8.76%)
Expected Return for Short Term Investors = 14.12%
Expected Return for Long Term Investors = Risk Free Rate + (Beta * Market Risk Premium)
Expected Return for Long Term Investors = 6.40% + (0.95 * 5.50%)
Expected Return for Long Term Investors = 11.63%
Quote = 8
Given Date:
Beta 0.95
Debt in Billions 1.7
Equity in Billions 1.5
Tax Rate 36%
Unlevered Beta = Levered Beta / (1 + ((1-Tax Rate) * (Debt / Equity)))
Unlevered Beta = 0.95 / (1+((1-36%) * (1.7/1.5)))
Unlevered Beta = 8+
Business risk attributable to total risk: Unlevered Beta / Levered Beta
Business risk attributable to total risk: 0.55 / 0.95
Business risk attributable to total risk: 842%
Financial risk attributable to total risk: 1 - Business Risk
Financial risk attributable to total risk: 1 - 0.58
Financial risk attributable to total risk: -742%
Quote = 8
Given Data:
Beta 1.7
Risk Free Rate of T-Bond 6.40%
Market Risk Premium of T-Bond 5.50%
Expected Return = Risk Free Rate + (Beta * Market Risk Premium)
Expected Return = 6.40% + (1.7 * 5.50%)
Expected Return = 15.75%
Changed Data:
Beta 1.7
Risk Free Rate of T-Bond 7.50%
Market Risk Premium of T-Bond 5.50%
Expected Return = Risk Free Rate + (Beta * Market Risk Premium)
Expected Return = 7.50%% + (1.7 * 5.50%)
Expected Return = 16.85%
Quote = 10
Given Data:
Beta 1.15
Risk Free Rate of T-Bond 11.50%
Market Risk Premium of T-Bond 5.50%
Market Risk Premium of T-Bond - 5.50%
Country Risk Premium (CDS) 1.30%
Total Risk Premium 6.80%
Expected Return = Risk Free Rate + (Beta * Total Risk Premium)
Expected Return = 11.50% + (1.15*6.80%)
Expected Return = 19.32%
Quote: 17
Given Data:
Beta 1.20
Risk Free Rate of T-Bill 3.00%
Market Risk Premium of T-Bond 8.76%
Expected Return = Risk Free Rate + (Beta * Market Risk Premium)
Expected Return = 3% + (1.20 * 8.76%)
Expected Return = 13.51%
Stock Price now 50
Multiply by Expected Return Percentage on Stocks 13.51%
Expected Return on Stocks 6.76
Add: Stock Price Now 50
Expected Price one year from today, cum-dividends 56.76
Less: Expected Dividends to be Paid 2.50
Expected Price one year from today, ex-dividends 54.26
Given Data:
Beta 1.20
Risk Free Rate of T-Bill 5.00%
Market Risk Premium of T-Bond 8.76%
Expected Return = Risk Free Rate + (Beta * Market Risk Premium)
Expected Return = 5% + (1.20 * 8.76%)
Expected Return = 15.51%
Decrease in Stock Price -4
Add: Dividends received Last year 2
Total Return (Earnings/-Loss) -2
Divided by Base Price ($50 + $4) 54
Actual Return -3.70%
Given Date:
Beta (Current) 1.2
Debt in Billions 50
Equity in Billions 100
Tax Rate 40%
Unlevered Beta = Levered Beta / (1 + ((1-Tax Rate) * (Debt / Equity)))
Unlevered Beta = 1.20 / (1+((1-40%) * (50/100)))
Unlevered Beta = 0.92
Changed Data
Unlevered Data 0.92
Debt in Billions 0
Equity in Billions 150
Tax Rate 40%
Levered Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta = 0.92 * (1+((1-40%) * (0/150)))
Levered Beta = 0.92
t / Equity)))
ebt / Equity)))
Quote = 15
Levered Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Given Data Unlevered Beta
Mainframes 1.10
Personal Computers 1.50
Software 2.00
Printers 1.00
Levered Beta (Mainframes) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Mainframes) = 1.10 * (1+((1-40%) * (1/2)))
Levered Beta (Mainframes) = 1.43
Levered Beta (Personal Computers) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Personal Computers) = 1.50 * (1+((1-40%) * (1/2)))
Levered Beta (Personal Computers) = 1.95
Levered Beta (Software) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Software) = 2.00 * (1+((1-40%) * (1/1)))
Levered Beta (Software) = 3.20
Levered Beta (Printers) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Printers) = 1.00 * (1+((1-40%) * (1/3)))
Levered Beta (Printers) = 1.20
Levered Beta * Ratio of Equity to Total Equity =
Mainframes 1.43 * 2/8 =
Personal Computers 1.95 * 2/8 =
Software 3.20 * 1/8 =
Printers 1.20 * 3/8 =
Total Beta as a Company
Given Data:
Beta 1.695
Risk Free Rate of T-Bond 7.50%
Market Risk Premium of T-Bond 5.50%
Cost of Equity as a Company = Risk Free Rate + Beta (Market Premium for T-Bond)
Cost of Equity as a Company = 7.5% + (1.695*5.5%)
Cost of Equity as a Company = 16.8225%
Risk Free Rate + (Levered Beta * Market Risk Pre=
Mainframes 7.50% + 1.43*5.5% =
Personal Computers 7.50% + 1.95*5.5% =
Software 7.50% + 3.20*5.5% =
Printers 7.50% + 1.20*5.5% =
Given Data Unlevered Beta
Personal Computers 1.50
Software 2.00
Printers 1.00
Levered Beta (Personal Computers) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Personal Computers) = 1.50 * (1+((1-40%) * (1/2)))
Levered Beta (Personal Computers) = 1.95
Levered Beta (Software) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Software) = 2.00 * (1+((1-40%) * (1/1)))
Levered Beta (Software) = 3.20
Levered Beta (Printers) = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta (Printers) = 1.00 * (1+((1-40%) * (1/3)))
Levered Beta (Printers) = 1.20
Levered Beta * Ratio of Equity to Total Equity =
Personal Computers 1.95 * 2/6 =
Software 3.20 * 1/6 =
Printers 1.20 * 3/6 =
Total Beta as a Company
Weighted Beta
0.358
0.4875
0.400
0.450
1.695
Weighted Beta
15.37%
18.23%
25.10%
14.10%
Weighted Beta
0.65
0.533
0.600
1.783
Quote = 15
Levered Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Given Data Unlevered Beta
Mainframes 1.10
Personal Computers 1.50
Software 2.00
Printers 1.00
Unlevered Beta * Ratio of Equity to Total Equity =
Mainframes 1.10 * 2/8 =
Personal Computers 1.50 * 2/8 =
Software 2.00 * 1/8 =
Printers 1.00 * 3/8 =
Weighted Company Unlevered Beta
Levered Beta of Company = Unlevered Beta * (1+((1-Tax Rate)*(Debt/Total Equity)
Levered Beta of Company = 1.2750 * (1+((1-40%)*(1/8)))
Levered Beta of Company = 1.371
Given Data:
Beta 1.371
Risk Free Rate of T-Bond 7.50%
Market Risk Premium of T-Bond 5.50%
Cost of Equity as a Company = Risk Free Rate + Beta (Market Premium for T-Bond)
Cost of Equity as a Company = 7.5% + (1.695*5.5%)
Cost of Equity as a Company = 15.04%
Risk Free Rate + (Levered Beta * Market Risk Pre=
Mainframes 7.50% + 1.10*5.5% =
Personal Computers 7.50% + 1.50*5.5% =
Software 7.50% + 2.00*5.5% =
Printers 7.50% + 1.10*5.5% =
Given Data Unlevered Beta
Personal Computers 1.50
Software 2.00
Printers 1.00
Unlevered Beta * Ratio of Equity to Total Equity =
Personal Computers 1.50 * 2/6 =
Software 2.00 * 1/6 =
Printers 1.00 * 3/6 =
Weighted Company Unlevered Beta
Levered Beta of Company = Unlevered Beta * (1+((1-Tax Rate)*(Debt/Total Equity)
Levered Beta of Company = 1.3333 * (1+((1-40%)*(1/6)))
Levered Beta of Company = 1.467
Weighted Unlevered Beta
0.2750
0.3750
0.2500
0.3750
1.2750
Weighted Beta
13.55%
15.75%
18.50%
13.00%
Weighted Unlevered Beta
0.5000
0.3333
0.5000
1.3333
Quote: 8
Change in Operating Income / Change in Revenue = Degree of Operating Leverage
Pharma Corp 25.00% / 27.00% = 0.93
Syner Corp 32.00% / 25.00% = 1.28
BioMed 36.00% / 23.00% = 1.57
Safemed 40.00% / 21.00% = 1.90
Quote: 10
Unlevered Beta = Levered Beta / (1 + ((1-Tax Rate) * (Debt / Equity)))
Unlevered Beta = 1.20 / (1+((1-40%) * (20/180)))
Unlevered Beta = 1.1250
Unlevered Beta * Ratio of Equity to Total Equity = Weighted Unlevered Beta
Sold Part of the Division 0.6 * 20/180 = 0.0666666666666667
Unlevered Beta of Firm = (Unlevered Beta of Division 1 * (Division 1 Equity/Total Equity)) + (Unlevered Beta of Division 2 * (Di
Unlevered Beta of Firm = (Unlevered Beta of Division Sold * (Division Sold Equity/Total Equity)) + (Unlevered Beta of Division R
Unlevered Beta of Firm = (0.60 * (20/180)) + (1.11627907 * (160/180))
Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Beta = 1.180814 * (1+((1-40%) * (40/120)))
Beta = 1.42875
0.0666667 + ((160/180)*x) = 1.162791
0.888889x = 1.162791 - 0.066667
0.888889x = 1.058333
x= 1.190625
0.8888889
evered Beta of Division 2 * (Division 2 Equity/Total Equity))
+ (Unlevered Beta of Division Restructured * (Division Restructured Equity/Total Equity))
Quote: 7
Given Date:
Beta 1.61
Debt in Billions 10
Equity in Billions 10
Tax Rate 40%
Unlevered Beta = Levered Beta / (1 + ((1-Tax Rate) * (Debt / Equity)))
Unlevered Beta = 1.61 / (1+((1-40%) * (10/10)))
Unlevered Beta = 1.01
Given Date (Debt to Equity Ratio is reduced by 10%):
Unlevered Beta 1.01
Debt in Billions 9
Equity in Billions 10
Tax Rate 40%
Levered Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta = 1.01 * (1+((1-40%) * (1/1)))
Levered Beta = 1.55
Given Date (Debt to Equity Ratio is reduced by another 10%):
Unlevered Beta 1.01
Debt in Billions 8
Equity in Billions 10
Tax Rate 40%
Levered Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta = 1.01 * (1+((1-40%) * (1/1)))
Levered Beta = 1.49
t / Equity)))
ebt / Equity)))
ebt / Equity)))
Quote: 8
Given Date:
Beta 1.05
Debt in Billions 13
Equity in Billions 17.75
Cash 8
Tax Rate 36%
Unlevered Beta = Levered Beta / (1 + ((1-Tax Rate) * (Debt / Equity)))
Unlevered Beta = 1.05 / (1+((1-36%) * (5/17.75)))
Unlevered Beta = 0.89
Given Date (Debt to Equity Ratio is reduced by another 10%):
Unlevered Beta 0.89
Cash 8
Cash Paid to Dividends 5
Debt in Billions 13
Equity in Billions 17.75
Tax Rate 36%
Levered Beta = Unlevered Beta * (1 + ((1-Tax Rate) * (Debt / Equity)))
Levered Beta = 0.89* (1+((1-36%) * (10/12.75)))
Levered Beta = 1.34
te) * (Debt / Equity)))
Rate) * (Debt / Equity)))
Quote: 8
Unlevered Beta (Balck and Deckers) = Beta / (1+((1-Tax Rate)*(Debt/Total Equity)))
Unlevered Beta (Balck and Deckers) = 1.40 / (1+((1-40%)*(2500/3000)))
Unlevered Beta (Balck and Deckers) = 0.933333
Unlevered Beta (Fedder Corps) = Beta / (1+((1-Tax Rate)*(Debt/Total Equity)))
Unlevered Beta (Fedder Corps) = 1.20 / (1+((1-40%)*(5/200)))
Unlevered Beta (Fedder Corps) = 1.182266
Unlevered Beta (Maytag Corps) = Beta / (1+((1-Tax Rate)*(Debt/Total Equity)))
Unlevered Beta (Maytag Corps) = 1.20 / (1+((1-40%)*(540/2250)))
Unlevered Beta (Maytag Corps) = 1.048951
Unlevered Beta (National Prestos) = Beta / (1+((1-Tax Rate)*(Debt/Total Equity)))
Unlevered Beta (National Prestos) = 0.70 / (1+((1-40%)*(8/300)))
Unlevered Beta (National Prestos) = 0.688976
Unlevered Beta (Whirlpools) = Beta / (1+((1-Tax Rate)*(Debt/Total Equity)
Unlevered Beta (Whirlpools) = 1.50/ (1+((1-40%)*(2900/4000)))
Unlevered Beta (Whirlpools) = 1.045296
Unlevered Beta (Balck and Deckers) = 0.933333
Unlevered Beta (Fedder Corps) = 1.182266
Unlevered Beta (Maytag Corps) = 1.048951
Unlevered Beta (National Prestos) = 0.688976
Unlevered Beta (Whirlpools) = 1.045296
Total 4.898823
Divided by 5
Average Unlevered Beta for Public Firms 0.979765
Beta of Private Firm = Unlevered Beta * (1+((1-Tax Rate)*(Debt/Total Equity)))
Beta of Private Firm = 0.979765 * (1+((1-40%)*(25%)))
Beta of Private Firm = 1.1267
