Consider the following airline industry data from mid-2009: a. Use the estimates in table, to estimate...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the following airline industry data from mid-2009: a. Use the estimates in table, to estimate the debt beta for each firm (use an average if multiple ratings are listed). b. Estimate the asset beta for each firm. c. What is the average asset beta for the industry, based on these firms? a. Use the estimates in table, to estimate the debt beta for each firm (use an average if multiple ratings are listed). The beta of the debt for each company is: (Round to three decimal places.) Market Capitalization ($ million) Company Name Delta Air Lines (DAL) Southwest Airlines (LUV) JetBlue Airways (JBLU) Continental Airlines (CAL) b. Estimate the asset beta for each firm. The beta of the asset for each company is: (Round to three decimal places.) 4,933.3 4,943.8 1,219.8 1,106.1 Total Enterprise Value Debt Debt ($ million) Equity Beta Ratings Beta 17,023.8 1.949 BB 0.170 6,364.3 0.972 A/BBB 0.075 3,886.3 1.893 B/CCC 0.285 4,432.3 2.058 B 0.260 Total Enterprise Market Capitalization ($ million) Value Debt Asset ($ million) Equity Beta Beta Beta 4,933.3 17,023.8 1.949 0.170 0.686 4,943.8 6,364.3 0.972 0.075 0.772 1,219.8 3,886.3 1.893 0.285 0.790 1,106.1 4,432.3 2.058 0.260 0.709 Company Name Delta Air Lines (DAL) Southwest Airlines (LUV) JetBlue Airways (JBLU) Continental Airlines (CAL) c. What is the average asset beta for the industry, based on these firms? The average asset beta for the industry is .739. (Round to three decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) By Rating Average Beta Average Debt Betas by Rating and Maturity A and above < 0.05 BBB 0.10 BB B CCC 0.17 0.26 0.31 (BBB and above) By Maturity Average Beta 10-15 Year > 15 Year 0.14 Source: S. Schaefer and I. Strebulaev, "Risk in Capital Structure Arbitrage," Stanford GSB working paper, 2009. 1-5 Year 0.01 5-10 Year 0.06 0.07 Consider the following airline industry data from mid-2009: a. Use the estimates in table, to estimate the debt beta for each firm (use an average if multiple ratings are listed). b. Estimate the asset beta for each firm. c. What is the average asset beta for the industry, based on these firms? a. Use the estimates in table, to estimate the debt beta for each firm (use an average if multiple ratings are listed). The beta of the debt for each company is: (Round to three decimal places.) Market Capitalization ($ million) Company Name Delta Air Lines (DAL) Southwest Airlines (LUV) JetBlue Airways (JBLU) Continental Airlines (CAL) b. Estimate the asset beta for each firm. The beta of the asset for each company is: (Round to three decimal places.) 4,933.3 4,943.8 1,219.8 1,106.1 Total Enterprise Value Debt Debt ($ million) Equity Beta Ratings Beta 17,023.8 1.949 BB 0.170 6,364.3 0.972 A/BBB 0.075 3,886.3 1.893 B/CCC 0.285 4,432.3 2.058 B 0.260 Total Enterprise Market Capitalization ($ million) Value Debt Asset ($ million) Equity Beta Beta Beta 4,933.3 17,023.8 1.949 0.170 0.686 4,943.8 6,364.3 0.972 0.075 0.772 1,219.8 3,886.3 1.893 0.285 0.790 1,106.1 4,432.3 2.058 0.260 0.709 Company Name Delta Air Lines (DAL) Southwest Airlines (LUV) JetBlue Airways (JBLU) Continental Airlines (CAL) c. What is the average asset beta for the industry, based on these firms? The average asset beta for the industry is .739. (Round to three decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) By Rating Average Beta Average Debt Betas by Rating and Maturity A and above < 0.05 BBB 0.10 BB B CCC 0.17 0.26 0.31 (BBB and above) By Maturity Average Beta 10-15 Year > 15 Year 0.14 Source: S. Schaefer and I. Strebulaev, "Risk in Capital Structure Arbitrage," Stanford GSB working paper, 2009. 1-5 Year 0.01 5-10 Year 0.06 0.07
Expert Answer:
Related Book For
Posted Date:
Students also viewed these finance questions
-
A ruptured pipe in an offshore oil rig produces a circular oil slick that is T feet thick at a distance r feet from the rupture, where At the time the spill is contained, the radius of the slick is 7...
-
Consider the following airline industry data from mid-2009: a. Use the estimates in Table 12.3 to estimate the debt beta for each firm (use an average if multiple ratings are listed). b. Estimate the...
-
CASE STUDY. Case Study Chapters 1 and 2. Please post both case studies in Assignment Drop Box as one MS Word apa formate document. Note: See template provided for case study papers. Chapter 1 - Listo...
-
Costs associated with various intangibles of a company may either be expensed when incurred or capitalized and amortized. Such costs might be recorded in any of the following ways: a. Charged to the...
-
Your retirement fund consists of a $5,000 investment in each of 15 different common stocks. The portfolio's beta is 1.20. Suppose you sell one of the stocks with a beta of 0.8 for $5,000 and use the...
-
Although the customer loyalty project at Petrie Electronics had gone slowly at first, the past few weeks had been fast-paced and busy, Jim Watanabe, the project manager, thought to himself. He had...
-
The following information is available to assist you in preparing a bank reconciliation for Calico Corners on May 31, 2010: a. The balance on the May 31, 2010, bank statement is $8,432.11. b. Not...
-
Externalities and the Environment Meyer describes the "Tragedy of the Commons." The IMF article explains how this type of problem is an example of an "externality." What is an externality? What might...
-
A Corp has $250,000 in taxable income. Benny & Jane are 50% partners in A Partnership. The partnership net profit is $250,000. 1. What amount of taxes liability that A Corp owes to the IRS for...
-
Distinguish between the short-run aggregate supply curve (SRAS) and long-run aggregate supply curve (LRAS). Motivate your answer with the aid of diagrams. (10) 3.2 List and discuss any three (3)...
-
You invest $10000 in a risky asset with an expected rate of return of 0.15 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.05. If you have a risk-aversion parameter of 3.5,...
-
A plant that supplies 1 unit of electricity per year, costs $1 billion to build, lasts 25 years, and has an annual operating cost of $0.2 billion; it costs $0.1 billion to decommission the plant at...
-
Chin and Hamdan work in GG Electronics Company located in Northern Malaysia. Both of them found that there are many unjust issues that occur in the management, especially those involving the welfare...
-
1. If you deposit $1,849.00 into an account paying 12.08% annual interest compounded monthly, how many years until there is $11,622.00 in the account? 2. What is the value today of receiving a single...
-
On March 31, 2013, Peppermint Patty Corp. sold $1,000,000 (par value) 8%, 10-year bonds for $961,500 including accrued interest. The bonds were dated January 1, 2013. Interest is paid semi-annually...
-
Prairie Outfitters, Inc., a retailer, accepts paymnent through credit cards. During August, credit card sales amounted to $12,000. The processor charges a 3% fee. Assuming that the credit card...
-
Your oldest daughter is about to start kindergarten at a private school. Tuition is $10,000 per year, payable at the beginning of the school year. You expect to keep your daughter in private school...
-
Suppose a risky security pays an expected cash flow of $80 in one year. The risk-free rate is 4%, and the expected return on the market index is 10%. a. If the returns of this security are high when...
-
According to the managerial entrenchment theory, managers choose capital structures so as to preserve their control of the firm. On the one hand, debt is costly for managers because they risk losing...
-
Santinis new contract for 2019 indicates the following compensation and benefits: Santini is 54 years old at the end of 2019. He is single and has no dependents. Assume that the employer matches $1...
-
In 2019, Nina contributes 10 percent of her $100,000 annual salary to her 401(k) account. She expects to earn a 7 percent before-tax rate of return. Assuming she leaves this (and any employer...
-
In 2019, Nitai (age 40) contributes 10 percent of his $100,000 annual salary to a Roth 401(k) account sponsored by his employer, AY Inc. AY Inc. matches employee contributions to the employees...
Study smarter with the SolutionInn App