Suppose that Apex Health Services has four different projects. These projects ar

Question

Suppose that Apex Health Services has four different projects. These projects are listed below, along with the amount of capital invested and estimated corporate and market betas: Project Amount Invested Corporate Beta Market Beta Walk-in clinic $ 500,000 1.5 1.1 MRI facility 2,000,000 1.2 1.5 Clinical lab. 1,500,000 0.9 0.8 X-ray lab. 1,000,000 0.5 1.0 $5,000,000 a. Why do the corporate and market betas differ for the same project? b. What is the overall corporate beta of Apex Health Services? Is the calculated beta consistent with corporate risk theory? c. What is the overall market beta of Apex Health Services? d. How does the riskiness of Apex's stock compare with the riskiness of an average stock? e. Would stock investors require a rate of return on Apex that is greater than, less than, or the same as the return on an average-risk stock?

Explanation / Answer

a) Why do the corporate and market betas differ for the same project?
Answer:
Beta is a measure of volatility or the systematic risk of the project. Market beta and corporate beta can be different even for the same project because the level of risk for an individual organisation can be different when compared to the entire market as a whole.

e) Would stock investors require a rate of return on Apex that is greater than, less than, or the same as the return on an average-risk stock?
Answer:
With reference to the above answer, since the riskiness is less than the average stock, the rate of return on Apex should be less than the return on an average-risk stock.

b) What is the overall corporate beta of Apex Health Services?
c) What is the overall market beta of Apex Health Services?
Answer:
Overall beta is calculated as the weighted average beta of all the projects as follows:

Overall corporate beta of Apex Health Services = 1.00
Overall market beta of Apex Health Services = 1.15

d) How does the riskiness of Apex's stock compare with the riskiness of an average stock?
Answer:
The overall market beta of Apex is greater than overall corporate beta of Apex. This means that the riskiness of Apex's stock is less as compared to the average stock.

e)

Sl No. Project Capital invested Corporate Beta Market Beta Weighted avg corporate beta Weighted avg corporate beta 1 Walk-in clinic 500000 1.5 1.1 0.15 0.11 2 MRI Facility 2000000 1.2 1.5 0.48 0.60 3 Clinical Lab 1500000 0.9 0.8 0.27 0.24 4 X-ray Lab 1000000 0.5 1.0 0.10 0.20 Total 5000000 1.00 1.15

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