Question

Look up the beta value for three publicly traded corporations operating in the same industry. Create a small table reporting your findings. Now choose three publicly-traded companies in very different industries and add these results to your table. Discuss your expectations for the similarities or differences in betas within the two categories, and then discuss how the results in your table compare to your expectations. Upload your work.

Answer 1

Calculating Beta From Comparable Public Companies

In this approach, we first need to find the average beta of the publicly-traded companies that generate income from similar operations as the private company. This will be a proxy for the industry average levered beta. Second, we need to unlever the average beta using the average debt-to-equity ratio for these comparable companies. The final step is to re-lever beta, using the private company’s target debt-to-equity ratio.

Assume we want to estimate the beta of an illustrative energy services company with a target debt-to-equity ratio of 0.5, and the following companies are the most comparable companies:

Comparable Companies, as of year-end 2019	Beta	Debt	Equity	D/E
HCL	1.6	7,840	16,267	0.48
DELL	1.65	10,565	37,850	0.28
AMAZON	1.71	523.23	1653.47	0.32
GOOGLE	1.69	1,627.84	4079.74	0.40
Averages
Weighted average beta	1.64
Weighted average D/E	0.34