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krek1111 [17]
3 years ago
11

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:
miv72 [106K]3 years ago
8 0

Answer:

The firm’s equity beta is therefore equal to 0.85.

Explanation:

Note: The data in the question are merged together. They are therefore sorted before answering the question. See the attached pdf file for the complete question with the sorted data.

The explanation of the answer is now provided as follows:

The equity beta refers to a beta that considers different levels of debt of a firm. The equity beta is also known as the levered beta or the project beta. The equity beta is therefore different from the asset beta.

Asset beta refers to a beta does not consider debt and assume that the firm uses only equity financing. Asset beta is known as unlevered beta.

The Firm’s equity can be calculated using the following steps:

Step 1: Calculation of average unlevered beta of the firm

Unlevered beta = Levered beta / (1 + ((1 - Tax rate) * (Debt / Equity ratio))) ……… (1)

<u>Where for UPS;</u>

Levered beta = Beta E = Beta of Equity = 0.80

Tax rate = 0

Debt = Market value of debt = $5 billion

Equity = Market value of equity = Stock Price per share * Number of shares outstanding = $65 * 0.7 billion = $45.50 billion

Substituting the values into equation (1), we have:

UPS unlevered beta = 0.80 / (1 + ((1 - 0) * (5 / 45.50))) = 0.720792079207921 = 0.72

<u>Where for FedEx;</u>

Levered beta = Beta E = Beta of Equity = 1.10

Tax rate = 0

Debt = Market value of debt = $3 billion

Equity = Market value of equity = Stock Price per share * Number of shares outstanding = $55 * 250 million = $13.75 billion

Substituting the values into equation (1), we have:

FedEx unlevered beta = 1.10 / (1 + ((1 - 0) * (3 / 13.75))) = 0.902985074626866 = 0.90

Therefore, firm’s averaged unlevered beta can be calculated as follows:

Firm’s averaged unlevered beta = (UPS unlevered beta + FedEx unlevered beta) / 2 = (0.72 + 0.90) / 2 = 0.81

Step 2: Calculation of firm’s levered beta

Firms’ levered beta = Firm’s averaged unlevered beta * (1 + ((1 - Tax rate) * (Debt / Equity ratio))) …….. (2)

Where;

Firm’s averaged unlevered beta = 0.81

Tax rate = 0

Debt = Market value of risk-free debt = $20 million

Equity = Market value of equity = $450 million

Substituting the values into equation (2), we have:

Firms’ levered beta = 0.81 * (1 + ((1 - 0) * (20 / 450))) = 0.846 = 0.85

Since from the definitions above, the equity beta is also known as the levered beta, the firm’s equity beta is therefore equal to 0.85.

Download pdf
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Firms U and L each have the same amount of assets, investor-supplied capital, and both have a return on investors' capital (ROIC
Tanya [424]

Answer:

The correct option is a.

Explanation:

In the question, it is given that there are two firms namely U and L who has same same amounts of assets, investor supplied material, and Return on investor capital.

The Firm U is unleveraged which has 100% equity

whereas,  Firm L is leveraged firm which has 50% debt and 50% equity

As we have to compare these two firms based on return on equity.

So, based on ROE, Firm U has 100% equity so it have more equity

And, the Firm L have 50% equity which means the firm has low equity as 50% contribution is gone to the debt.

The rest information which is given in the question is irrelevant. So, it is ignored.

Thus, the Firm L has a lower ROE than Firm U

Hence, the correct option is a.

4 0
2 years ago
You are saving for a Porsche Carrera Cabriolet, which currently sells for nearly half a million dollars. Your plan is to deposit
Firdavs [7]

Answer:

  • 1. $486,134.86
  • 2. $525,593.86
  • 3. $602,492.04

Explanation:

You need to use the formula to calculate the future value of a constant annual deposit:

      Future\text{ }value=Deposit\times \bigg[\dfrac{(1+r)^n-1}{r}\bigg]

Where r is the expected percent return, and n the number of years.

<em><u>1. For a deposit of  $30,800 at the end of each year for the next 11 years, with 7% interest.</u></em>

You will have saved:

         Future\text{ }value=\$ 30,800\times \bigg[\dfrac{(1+0.07)^{11}-1}{0.07}\bigg]

         Future\text{ }value=\$ 30,800\times 15.7835993=\$486,134.86

<em><u>2.  For a deposit of $33,300 each year, for the same number of years and with the same interest rate.</u></em>

You will have saved:

       Future\text{ }value=\$ 33,300\times \bigg[\dfrac{(1+0.07)^{11}-1}{0.07}\bigg]

      Future\text{ }value=\$ 33,300\times 15.7835993=\$525,593.86

<em><u>3. For a deposit of $30,800 each year, but with 11 percent interest, for 11 years.</u></em>

        Future\text{ }value=\$ 30,800\times \bigg[\dfrac{(1+0.11)^{11}-1}{0.11}\bigg]

       Future\text{ }value=\$ 30,800\times 19.56143=\$602,492.04

3 0
2 years ago
Which of the following statements about steering needed resources to execution-critical value chain activities is false? a. Good
makkiz [27]

Answer: a. a. Good execution of a new or revised strategy often requires devoting more resources to some value chain activities and perhaps downsizing the operating budgets and resources devoted to activities/organizational units with a lesser role in the new strategy

Explanation:

Executing strategy is an action-oriented task which tests the ability of a manager to direct changes in an organization and also achieve certain improvements regarding operations.

The statement about steering needed resources to execution-critical value chain activities which is false is that good execution of a new or revised strategy often requires devoting more resources to some value chain activities and perhaps downsizing the operating budgets and resources devoted to activities/organizational units with a lesser role in the new strategy.

6 0
3 years ago
A multinational enterprise, such as starbucks, is a firm that engages in foreign direct investment by directly investing in, con
Bas_tet [7]
Answer is true. Multinational companies engage in FDI in other countries.
3 0
3 years ago
Porika Company purchased a truck for $57,000. The company expected the truck to last four years or 100,000 miles, with an estima
zhannawk [14.2K]

Answer:

<u><em>Units-of-activity Depreciation : $ 13,770</em></u>

<u><em>Double Declining Method Depreciation For the Second Year= $ 9120</em></u>

Explanation:

Formula:  Units-of-activity Depreciation

Annual Depreciation= Depreciable Value×Units produced during the year/Estimated total production

<em><u>Annual Depreciation</u></em> = $ 51,000 * 27000/100,000

                                     = $ 13,770

Depreciable Value = Original cost – Scrap value

<u><em>Depreciable Value</em></u> = $57000 - $6000= $ 51000

Formula : Double Declining Method

Double Of Straight Line Method Depreciation Rate = 2 * 1/10= 2* 10%= 20%

20 % of $ 57,000 for the first year=  $ 11,400

<u><em>Depreciation </em></u>20 % of $ 45,600 for the second year= $ 9120

8 0
3 years ago
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