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wel
3 years ago
8

For the CAPM model, what beta should I choose for a beverage company:average beta for that industry, unlevered beta or unlevered

beta corrected for cash? What is the difference between these 3 betas?
Thank you.
Chemistry
1 answer:
Artemon [7]3 years ago
4 0
In order to do that procedure you will need to <span>pass from a leverred beta to an unleverred cash adjusted beta. The forst step is to unlever the normal beta: Unlevered beta = Beta / (1 + (1-tax rate) D/E) The second step would be to correct for cash: Cash-adjusted beta = Unlevered beta / (1 – Cash/ Firm Value), where firm value is market value of equity + market value of debt. Each one of the three betas is different: 1) </span>Average beta of the industry= beta levered and includes the debt to equity of the industry. 2)  Unlevered beta includes cash: since you are discounting FCFF or FCFE to get PV of operations you are usinga discount rate that doesn't take cash into account since cash is considered a non-operating asset and 3) <span>Use beta unlevered adjusted for cash (i.e without the impact of cash) to get the PV pf FCFF or FCFE and then add to this PV the cash balance.
I think this info can help you greatly</span>
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