A few publicly listed home appliance manufacturing companies have the following

Question

A few publicly listed home appliance manufacturing companies have the following beta, debt, and equity: Company Beta Debt Equity Usha 1.4 ? 2,500 ? 3,000 Sumeet 1.2 ? 5 ? 200 Butterfly 1.2 ? 540 ? 2,250 Prestige 0.7 ? 8 ? 300 Whirlpool 1.5 ? 2,900 ? 4,000 Calculate the beta of a private company with a debt equity ratio of 25%. (Tax Rate for all companies is 40%) (Hint- One way is to compute the unlevered betas of each of the five firms and then average these unlevered betas and substitute it as the unlevered beta of the private company)

Explanation / Answer

unlevered beta=levered beta/(1+(1-tax rate)*Debt/Equity)
Usha: 1.4/(1+(1-40%)*2500/3000)=0.9333
Sumeet: 1.2/(1+(1-40%)*5/200)=1.183
Butterfly: 1.2/(1+(1-40%)*540/2250)=1.04895
Prestige:0.7/(1+(1-40%)*8/300)=0.688976
Whirlpool:(1+(1-40%)*2900/4000)=1.435
Average unlevered beta=1.057705

Beta of private company=unlevered beta*(1+(1-tax rate)*Debt/Equity)=1.057705*(1+(1-40%)*25%)=1.216361

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