Question

You need to build a DCF model for an unlisted company. Since there are no market prices available for the company stock, you need to use comparable companies to estimate the beta of your target. After some research, you reduce the comparable universe to the following three companies: Comparable A • Levered Beta = 0.81 • Debt = 67 m$ • Equity = 181 m$ • Marginal Tax Rate = 28 % Comparable B • Levered Beta = 0.96 • Debt = 1819 m$ • Equity = 1836 m$ • Marginal Tax Rate = 22 % Comparable C • Levered Beta = 1.23 • Debt = 435 m$ • Equity = 333 m$ • Marginal Tax Rate = 23 % Calculate the levered beta of the target knowing that the target company has: • • • Debt = 138 m$ Equity = 232 m$ Marginal Tax Rate = 29 % Enter your answer with four decimal points.

Answer 1

Comparable Company	Levered Beta	Debt (m$)	Equity (m$)	Debt/Equity
Comparable A	0.81	67	181	0.3702
Comparable B	0.96	1819	1836	0.9907
Comparable C	1.23	435	333	1.3063
Average of Comparable A, B and C	1			0.8891

Now, we have to use the Average Levered Beta and the Average Debt/Equity of the Comparable companies to calculate the Unlevered Beta of the target company in the formula:

Unlevered Beta = Levered Beta / [1 + {(1 – Marginal Tax Rate)(Debt/Equity)}]

Given, Marginal tax rate of target company = 29%

So, Unlevered Beta of the target company = 1 / [1 + {(1 – 0.29)(0.8891)}]       = 0.6130

Also, Given, Debt of the target company = 138m$

And Equity of the target company = 232 m$

This implies Debt /Equity of the target company = 0.5948

Now, we have to use the Unlevered Beta of the target company and the Debt/Equity of the target company of the Comparable companies to calculate the Levered Beta of the target company in the formula:

Levered Beta = Unlevered Beta x [1 + {(1 – Marginal Tax Rate)(Debt/Equity)}]

So, Levered Beta of the target company = 0.6130 x [1 + {(1 – 0.29)(0.5948)}]       = 0.8719