a. Use the estimates in table EEB to estimate the debt beta for each firm (use a

Question

a. Use the estimates in table EEB to estimate the debt beta for each firm (use an average if multiple ratings are listed). b. Estimate the asset beta for each firm. c. What is the average asset beta for the industry, based on these firms? a. Use the estimates in tableE to estimate the debt beta for each firm (use an average if multiple ratings are listed). The beta of the debt for each company is: (Round to three decimal places.) Market Capitalization $million) 4,945.8 4,886.7 1,252.6 1,083.5 Total Enterprise Value million) 16,979.2 6,391.1 3,860.6 4,425.6 Debt Ratings Debt Beta Com Delta Air Lines (DAL) Southwest Airlines (LUV) JetBlue Ainways (JBLU) Continental Airlines (CAL) Name Beta 1.924 0.938 1.807 2.039 ABBB BACCC Data Table Data Table Capitalization Enterprise Value ($ milli 16,979.2 6,391.1 3,860.6 4,425.6 Debt Betas by Rating and Matu BBB 0.10 Company Name Delta Air Lines (DAL) Southwest Airlines (LUV) JetBlue Airways (JBLU) Continental Airlines (CAL) Beta Debt Ratin A and above

Explanation / Answer

Debt Beta

DAL 0.17

LUV 0.075

JBLU 0.285

CAL 0.26

Asset Beta

DAL =(0.17*(16979.2-4945.8)+1.924*4945.8)/16979.2=0.680915308

LUV =(0.075*(6391.1-4886.7)+0.938*4886.7)/6391.1=0.734858569

JBLU =(0.285*(3860.6-1252.6)+1.807*1252.6)/3860.6=0.778824069

CAL =(0.26*(4425.6-1083.5)+2.039*1083.5)/4425.6=0.695544672

Average Asset Beta=(0.680915308+0.734858569+0.778824069+0.695544672)/4=0.722535655

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