Company X has an enterprise value of $100 million, composed of 80% equity and 20% debt and no cash positions. Company X has a debt beta of 0.10. The effective annual risk-free rate is 2%, and the market risk premium is 5% p.a. Company X is not publicly traded, but there are two comparable companies that are publicly traded with the following characteristics: 

 

Firm   Debt ($mill)    Equity ($mill)    Cash ($mill)    beta_D      beta_E

A      60               140               0                  0.5          1.7500

B      0                100              20                               0.8000

X      20               80                0                  0.1

 

Risk free rate: 2%

Market risk premium: 5%

 

1. What are the asset or firm betas of the two comparable firms? 

2. What are the operational/enterprise betas of the comparable firms?

3. What is your best estimate of company X's operational beta?

4. What is company X's expected return on debt?

5. What is company X's expected equity return?

Answer rating: 100% (QA)

To calculate the asset or firm beta of the two comparable firms we need to use the following formula ... View the full answer