Question

You collected the below information from Yahoo Finance about firms in the Home Appliance industry to estimate the beta of National Presto Industries (NPK) which currently has a debt to equity ratio (market values) of 75%, subject to a tax rate of 40% and its reported beta on Yahoo finance is 1.64. However, you believe you will have a better estimate of the beta for NPK if you estimate the levered beta from similar firms in the market.  

Firm	Beta	Debt	MV of Equity
Black &Decker	1.3	2200	5500
Fedders Co.	1.6	250	680
Maytag Co.	1.5	450	2250
National Presto	1.7	80	300
Whirlpool	1.5	2900	4000

Using the above information what is the levered beta of NPK?

		1.73
		1.51
		1.62
		1.44
		1.37

Answer 1

First, we compute the average unlevered beta of the similar firms.

Unlevered beta = levered beta / (1 + (1 - tax rate) * (debt / equity))

average unlevered beta of the similar firms. = 1.24

Next, we re-lever the average unlevered beta of the similar firms for NPK.

Levered beta = unlevered beta * (1 + (1 - tax rate) * (debt / equity))

Levered beta = 1.24 * (1 + (1 - 40%) * (75%))

Levered beta = 1.62

levered beta of NPK = 1.62