DLT inc. is a private company and has 2 lines of business: Oil & gas and energy management with 70% of the firm's sales generated by the Oil & gas division.  DLT has a target capital structure of 20% debt financing (D/V = 20%)

The following table shows the financials of selected comparable companies (in $mm)

1) Use the following numbers to fill in the missing standard deviations of stock returns in the last row of the table.

       i) 5%, 9% and 12%.

2) Calculate the asset beta and total beta of company OG and DLT.

3) Calculate the unlevered cost of equity (or unlevered cost of capital), cost of equity and cost of undiversified equity of DLT.

 

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Target capital structure Tax Rate D/V Debt Beta Equity Beta Oil & Gas Industry Company OG No 40% 40% 0 2.5 Energy Management Industry Company EM Yes 40% 10% 0 1.2 S&P500 Index 50-50 portfolio 10% Standard Deviation of monthly stock returns over latest 3 years *Note: Generally we select more than one comparable companies in each industry, to reduce the error and noise in estimation. 70-30 Portfolio 70% in Oil&Gas 7% Target capital structure Tax Rate D/V Debt Beta Equity Beta Oil & Gas Industry Company OG No 40% 40% 0 2.5 Energy Management Industry Company EM Yes 40% 10% 0 1.2 S&P500 Index 50-50 portfolio 10% Standard Deviation of monthly stock returns over latest 3 years *Note: Generally we select more than one comparable companies in each industry, to reduce the error and noise in estimation. 70-30 Portfolio 70% in Oil&Gas 7%

Answer rating: 100% (QA)

To value the shares of the subject company at the end of 2019 using the discounted stream of dividen... View the full answer