Question

1.what is risks or events cause a company beta to change?

2. if the beta of a company is 1.3456, and then it is now goes up by 20%.. what you happens to your cash flow, profit and loss, npv analysis and wacc analysis

Answer 1

Answer(1): Beta- It is the measure of risk. A company's beta is a measure of volatility. A stock's beta is a measure of systematic risk with respect to the stock market.

Events that cause a company beta to change- These are as following:

Debt- A company with high debt is considered highly leveraged company and has high beta. It has chance of default in repaying the debt. Total amount of company's debt will increase its total levered beta. A company's levered beta shows the volatility that is associated with the capital structure, if a company increases the debt level, its beta increases more than 1 and company's stock is more volatile than the market.

Revenues- If there is great variability in revenue, revenue growth is unstable then beta will be more.

Leverage- High operating and financial leverage increase the beta of the company. Manufacturing companies that have heavy investment in plan, machinery and equipment will generally have high operating leverage.

Answer(2): High beta always is risky for company. High beta increases cost of equity capital that further increases weighted average cost of capital (WACC), WACC is taken into NPV calculation to discount the cash flow, WACC is used to discount the cash flows to know the present value of future cash flow if WACC wil be more, Present value of cash will be less and NPV may be negative also.

20% increase in beta shows that company's will be more volatile.