Key facts and assumptions concerning Kroger Company, at December 12, 2007, appea
ID: 2722986 • Letter: K
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Key facts and assumptions concerning Kroger Company, at December 12, 2007, appear below. Using this information, answer the questions following. Facts and Assumptions Yield to maturity on long-term government bonds 4.54% Yield to maturity on company long-term bonds 6.32% Coupon rate on company long-term bonds 7.50% Market price of risk, or risk premium 6.30% Estimated company equity beta 1.05 Stock price per share $ 25.97 Number of shares outstanding 681.2 million Book value of equity $ 4,965 million Book value of interest-bearing debt $ 6,674 million Tax rate 35.0% Chapter 8 Problem 21 Information regarding Kroger Company, and four industry competitors is shown below, on December 12, 2007. Company Equity beta Interest-Bearing Debt Market value equity Kroger Company 1.05 $ 6,674.0 $ 17,690.8 Safeway Inc. 0.49 5,897.9 15,236.3 Supervalu Inc. 1.17 8,936.0 8,054.3 Whole Foods Markets 1.16 760.9 5,762.1 Winn Dixie Stores Inc. 2.56 160.1 916.8 . a. Estimate the industry asset beta, weighting each company by its proportion of total market value of equity. b. Relever the industry asset beta to reflect Kroger's capital structure, and to make another (industry-informed) estimate of Kroger's equity beta. Key facts and assumptions concerning Kroger Company, at December 12, 2007, appear below. Using this information, answer the questions following. Facts and Assumptions Yield to maturity on long-term government bonds 4.54% Yield to maturity on company long-term bonds 6.32% Coupon rate on company long-term bonds 7.50% Market price of risk, or risk premium 6.30% Estimated company equity beta 1.05 Stock price per share $ 25.97 Number of shares outstanding 681.2 million Book value of equity $ 4,965 million Book value of interest-bearing debt $ 6,674 million Tax rate 35.0% Chapter 8 Problem 21 Information regarding Kroger Company, and four industry competitors is shown below, on December 12, 2007. Company Equity beta Interest-Bearing Debt Market value equity Kroger Company 1.05 $ 6,674.0 $ 17,690.8 Safeway Inc. 0.49 5,897.9 15,236.3 Supervalu Inc. 1.17 8,936.0 8,054.3 Whole Foods Markets 1.16 760.9 5,762.1 Winn Dixie Stores Inc. 2.56 160.1 916.8 . a. Estimate the industry asset beta, weighting each company by its proportion of total market value of equity. b. Relever the industry asset beta to reflect Kroger's capital structure, and to make another (industry-informed) estimate of Kroger's equity beta.Explanation / Answer
Industry asset beta= weighted sum of beta of each company
Total Equity market Value= 17690.8+15236.3+8054.3+5762.1+916.8
Total market value of equity= $47660.3
Industry asset beta= 17690.8/47660.3*1.05+15236.3/47660.3*0.49+8054.3/47660.3*1.17+5762.1/47660.3* 1.16 +916.8/47660.3*2.56
Industry Asset Beta= 0.93
Relever the industry asset beta to reflect Kroger's capital structure, and to make another (industry-informed) estimate of Kroger's equity beta.
In Case of Kroger company debt to equity ratio= debt/equity
=6674/17690.8
D/E ratio= 0.38
Beta Levered= Beta Unlevered*(1+(1-tax rate)*D/E)
=0.93*(1+(1-35%)*0.38)
Beta Levered=1.16
Beta Levered or equity beta of kroger = 1.16
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