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tiny-mole [99]
3 years ago
9

We run a delivery service, and we believe our firm has market risk equally between that of UPS and FedEx. We know the following

about these 2 firms:______.
Stock Price per share # shares outstanding Market Value of Debt
UPS $65 0.7 billion $ 5 billion
FedEx $55 250 million $ 3 billion
We also have the following data on the securities of these firms:_______.
Beta E Beta D
UPS 0.8 0
FedEx 1.1 0.1
Assume that our firm has risk-free debt with market value $20 million and equity with market value $450 million. Assume that taxes are not relevant. Please estimate our firm’s equity beta
Business
1 answer:
mixer [17]3 years ago
4 0

Answer:

The answer is "0.85 "

Explanation:

In order to locate a beta of the company, we must find the average beta of unlevered UPS and FedEx and find a levered beta of the company.

      Price   Outstanding shares(Billion)  Market valu of equity(Billion)  Market value of debt(billions)     D/E Ratio

UPS       65                      0.7                   45.5                    5                   0.1099

FedEx    55                   0.25               13.75                        3                   0.2182

Unlevered \ beta= \frac{levered \ beta}{(1+((1- tax rate)\times(\frac{Debt}{Equity})))}

taxes desn't matter , given in the question so, assumed to be 0

   Unlevered \ beta \ for \ UPS= \frac{0.8}{1+(1-0)\times (0.1099)}

                                            = \frac{0.8}{1+(1)\times (0.1099)}\\\\= \frac{0.8}{1+(0.1099)}\\\\= \frac{0.8}{1.1099}\\\\=0.72

Unlevered \ beta \ for \ FedEx= \frac{1.1}{1+(1-0)\times (0.2182)}

                                            = \frac{1.1}{1+(1)\times (0.2182)}\\\\= \frac{1.1}{1+(0.2182)}\\\\= \frac{1.1}{1.2182}\\\\=0.90

Average \ Unlevered \ beta = \frac{0.72+0.90}{2}

                                       = \frac{1.62}{2}\\\\=0.81

\text{levered beta  of  the delivery service firm }= unlevered \ beta \times(1+(1-taxes) \times (\frac{debt}{equity}))

                                                              = 0.81 \times (1+(1-0)\times (\frac{20}{450})\\\\= 0.81 \times (1+(1)\times (0.04)\\\\= 0.81 \times (1+(0.04)\\\\= 0.81 \times (1.04)\\\\=0.85

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