1.) You are evaluating a privately-held target firm with a 25% marginal tax rate and a...

1.) You are evaluating a privately-held target firm with a 25% marginal tax rate and a targeted capital structure of 20% debt and 80% equity. You have identified a comparable firm with an equity beta of 1.34. The comparison firm has a marginal tax rate of 30% and a D/E ratio of 0.5. What is your estimate of the equity beta of the target firm?

2.) Suppose you are using industry average betas to estimate the cost of equity for your firm. The average beta (estimated from market model regressions of stock returns) for the 124 firms in the industry is 1.18, the average market value based debt-to-equity ratio is 21.2%, the average cash-to-firm value ratio is 2.8%, and the median enterprise value-to-EBITDA ratio for firms in the industry is 10.2x.

a. What is the industry average cash-adjusted unlevered beta? Assume a tax rate of 21% for firms in this industry.

b. Your firm has LTM EBITDA of $15.2 million, cash of $7.1 million, and total debt of $28.6 million. Your firm’s marginal tax rate is 18%. What is your estimate of the equity beta for your firm?

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Expert Solution

the question is related to calculation of equity beta.

jeff jeffy answered 1 year ago

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