Calculate levered beta for comp using regression analysis

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Reference no: EM131021970

Suppose you want to estimate the cost of equity for a private company in the food industry that has similarities to Hormel Foods (HRL), Tyson Foods (TSN) and Conagra Foods (CAG).

1) Pull 36 months of monthly price data from Yahoo finance for each comp company.

2) Using the adjusted Close price calculate 35 monthly returns for each comp.

3) Calculate a levered beta for each comp using a regression analysis (use ^GSPC as the market return).

4) Un-lever the comp betas assuming that each company will have a constant D/E and a debt beta of 0. (Find D from the "Key Statistics" section of Yahoo@ Finance "Total Debt (mrq); E is the Market Cap (intraday). You can ignore cash.

5) Assume that the private company will have a constant level of debt and re-lever your estimate of the asset beta to get a levered beta for the firm (assume that currently D is 5 billion and E is 20 billion and that the tax rate is 35%).

6) Assume a market risk premium of 5.5% and a risk free rate of 2.8%. What is the levered cost of equity?

Reference no: EM131021970

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