The CFO described in Problem 13.35 asks you to estimate the beta for Coral Gabless common stock
Question:
The CFO described in Problem 13.35 asks you to estimate the beta for Coral Gables’s common stock. Since the common stock is not publicly traded, you do not have the data necessary to estimate the beta using regression analysis. However, you have found a company with publicly traded stock that has operations which are exactly like those at Coral Gables. Using stock returns for this pure-play comparable firm, you estimate the beta for the comparable company’s stock to be 1.06. The market value of that company’s common equity is $45 million, and it has one debt issue outstanding with a market value of $15 million and an annual pretax cost of
4.85 percent. The comparable company has no preferred stock.
a. If the risk-free rate is
3.95 percent and the market risk premium is 6.01 percent, what is the beta of the assets of the comparable company?
b. If the total market value of Coral Gables’ financing consists of 35 percent debt and 65 percent equity (this is what the CFO estimates the market values to be) and the pretax cost of its debt is
5.45 percent, what is the beta for Coral Gables’s common stock?
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Step by Step Answer:
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates