As a financial analyst, you decide to use the bottom-up approach to estimate Rosenbaum Corporation's beta....

  

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As a financial analyst, you decide to use the bottom-up approach to estimate Rosenbaum Corporation's beta. First, you identified 6 guideline companies for Rosenbaum. Next, upon evaluating the business, you determined that the equity beta of Rosenbaum is influenced by its financial leverage, operating risk, and business risk. You decide to use the change in operating profit to change in sales revenue to proxy for the firm's business risks and the fixed cost to variable cost to proxy for operating risks. You find that Rosenbaum's operating risk is 0.45 and the business risk is 0.65. Currently, Rosenbaum has 15 million shares outstanding and a current share price of $30 per share. The current book value of debt is 100 million and its debt is considered risk free. The equity market risk premium is assumed to be 8% and is constant. Risk free rate is 4%. The tax rate is 20%. The accounting and equity market information of these guideline companies is provided in Table 1. You decide to equal weight each guideline company. Table 1: Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Beta 2.15 1.55 1.86 2.10 1.64 1.68 D/E 0.66 0.65 0.46 0.65 0.36 0.45 Tax Rate 0.18 0.22 0.24 0.18 0.20 0.22 Operating leverage 0.42 0.48 0.48 0.50 0.40 0.64 Business risk 0.62 0.56 0.56 0.72 0.60 0.42 Required 1. Compute the average Beta, D/E, Tax Rate, operating leverage and business risk of Company 1 to 6. Use simple average. 2. Based on the computations in step 1, calculate Rosenbaum's beta that is unlevered, and adjusted for its operating leverage and business risk. 3. Based on information derived from the previous steps, compute Rosenbaum's WACC. As a financial analyst, you decide to use the bottom-up approach to estimate Rosenbaum Corporation's beta. First, you identified 6 guideline companies for Rosenbaum. Next, upon evaluating the business, you determined that the equity beta of Rosenbaum is influenced by its financial leverage, operating risk, and business risk. You decide to use the change in operating profit to change in sales revenue to proxy for the firm's business risks and the fixed cost to variable cost to proxy for operating risks. You find that Rosenbaum's operating risk is 0.45 and the business risk is 0.65. Currently, Rosenbaum has 15 million shares outstanding and a current share price of $30 per share. The current book value of debt is 100 million and its debt is considered risk free. The equity market risk premium is assumed to be 8% and is constant. Risk free rate is 4%. The tax rate is 20%. The accounting and equity market information of these guideline companies is provided in Table 1. You decide to equal weight each guideline company. Table 1: Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Beta 2.15 1.55 1.86 2.10 1.64 1.68 D/E 0.66 0.65 0.46 0.65 0.36 0.45 Tax Rate 0.18 0.22 0.24 0.18 0.20 0.22 Operating leverage 0.42 0.48 0.48 0.50 0.40 0.64 Business risk 0.62 0.56 0.56 0.72 0.60 0.42 Required 1. Compute the average Beta, D/E, Tax Rate, operating leverage and business risk of Company 1 to 6. Use simple average. 2. Based on the computations in step 1, calculate Rosenbaum's beta that is unlevered, and adjusted for its operating leverage and business risk. 3. Based on information derived from the previous steps, compute Rosenbaum's WACC.

Answer rating: 100% (QA)

To calculate Rosenbaum Corporations beta we will follow the bottomup approach by averaging the betas ... View the full answer