75 starting with the pure plays equity beta we can

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Unformatted text preview: ting the company or companies that have a single line of business, Examples of pure plays where this line of business is similar to the project's, helps in estimating the market risk of a Company Industry βequity equity project. We estimate a project's asset beta by 7-Eleven Convenience 0.75 starting with the pure-play's equity beta. We can stores estimate the pure-play's equity beta by looking at Universal Corporation Tobacco 0.60 the relation between the returns on the purePOSCO Steel producer 1.00 play's stock and the returns on the market. Once American Water Works Water utility 0.45 we have the pure-play's equity beta, we can then Source: Value Line Investment Survey "unlever" it by adjusting it for the financial leverage of the pure-play company. Suppose a pure-play company has the following financial data: βequity = 1.1 Debt = $3,914 million Equity = $4,468 Its asset beta, βasset, is 0.6970: ⎡ ⎤ ⎢ ⎥ 1 ⎥ = 0.6970 βasset = 1.1 ⎢ ⎢⎛ $3, 914 ⎞ ⎞ ⎥ ⎛ ⎢ ⎜1 + ⎜ (1 − 0.34) ⎟⎥ $4, 468 ⎟ ⎠ ⎥...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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