Question: Rating A or above BBB BB B CCC Average default rate 0.2% 0.5% 2.3% 6.0% 12.2% Recession default rate 2.5% 3% 8.0% 16% 50% Average

Rating A or above BBB BB B CCC
Average default rate 0.2% 0.5% 2.3% 6.0% 12.2%
Recession default rate 2.5% 3% 8.0% 16% 50%
Average beta 0.05 0.1 0.18 0.25 0.3

Firm Debt rating Equity beta Market Capitalization Total Enterprise Value
1 BBB 1.3 2000 8000
2 A 0.8 2400 4000
3 B 1.75 3000 4500

a) Estimate the asset beta of Firm 1. Repeat for Firm 2 and Firm 3 b) Firm 1 and Firm 3 decide to merge into one firm. What is the asset beta for the conglomerate? c) Firm 2 wins a law suit and recieves 1000 cash. How would its asset beta change? Assume that the beta of cash is 0.02

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