Customer Service Chat
Get quote & make Payment
market beta, Portfolio Management
The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would be inappropriate to estimate beta from the actual share price behavior over such a short period. Instead it is proposed to ascertain, and where necessary adjust, the observed equity betas of other companies operating in the same industry, and with the same operating characteristics as Nelson, as these should be based on similar levels of systematic risk and be capable of providing an accurate estimate of Nelson’s beta
Three companies have been identified as firms having operations in the same industry as Nelson with identical operating characteristics. However, only one company, Oak plc, operates exclusively in the same industry as Nelson. The other two companies have some dissimilar activities or opportunities in additional to those which are the same as those of Nelson.
Details of the three companies are as follows;
a. Oak plc has an observed equity beta of 1.12. The capital structure at market value is 60% equity, 40% debt.
b. Beech plc has an observed equity beta of 1.11. It is estimated that 30% of the current market value of Beech is caused by risky growth opportunities which have an estimated beta of 1.9. The growth opportunities are reflected in the observed beta. Beech’s other activities are the same as Nelson’s. Beech is financed entirely by equity.
c. Pine plc has an observed equity beta of 1.14. Pine has two divisions, East and West. East’s operating characteristics are considered to be identical to those of Nelson. The operating characteristics of West are considered to be 50% more risky than those of East. In terms of financial valuation East is estimated as being twice as valuable as west. The capital structure of Pine at market values is 75% equity, 25% debt.
Nelson is financed by equity. The tax rate is 40%.
a. Assuming all debt is virtually risk-free, make three estimate of the equity beta of Nelson plc. The three estimates should be based, separately, on the information provided for Oak, Beech and Pine.
b. Explain why the estimated beta of Nelson, when eventually determined from observed share price movements, may differ from the value derived from the approach in (a) above.
c. State the reason why a company has a very volatile share price and is generally considered to be extremely risky can have a lower beta value, and therefore lower financial risk, than an equally geared firm whose share price is much less volatile.
Posted Date: 4/5/2013 1:17:57 AM | Location : Kenya
Ask an Expert
market beta, Assignment Help, Ask Question on market beta, Get Answer, Expert's Help, market beta Discussions
Write discussion on market beta
Your posts are moderated
Write your message here..
Discuss procurement development model, Problem 1: Excel, a private firm...
Problem 1: Excel, a private firm, is in the process of purchasing an equipment representing an investment of about Rs10million. After considering all the offers from the pote
Market Beta, The management of Nelson plc wish to estimate their firm’s equ...
The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would
Hatch system of stock investment, b) Mr. Castro uses a 20% hatch system of ...
b) Mr. Castro uses a 20% hatch system of timing when to invest in a stock market. In a given, the top of a given share was Shs.150/= and its bottom was Shs.90. During the year the
Coursework, i need help to complete my coursework.
i need help to complete my coursework.
A-shares, These are the shares in mainland China-based companies that trade...
These are the shares in mainland China-based companies that trade on Chinese stock exchanges like Shanghai Stock Exchange and the Shenzhen Stock Exchange. A-shares are usually only
Brokers, Kinds of Brokers and assistants
Kinds of Brokers and assistants
Investment portfolio analysis, Having investment in both Proctor and Gamble...
Having investment in both Proctor and Gamble (PG), and Research in Motion (RIMM) from September 2010 upto now. Write a four-page analysis. To compare their performance to that of t
Portfolio Construction, Hello I was wondering how can I construct a portfol...
Hello I was wondering how can I construct a portfolio for analyzing momentum effect. The portfolio should include four stocks out of 40 with highest returns
Arbitrage pricing theory, looking for questions with answers given on arbit...
looking for questions with answers given on arbitrage pricing theory
Calculate returns and correlations, Place the information described in this...
Place the information described in this stage in the worksheet titled "Analysis". Step 1) Calculate the arithmetic average periodic return and standard deviation of periodic ret
Accounting Assignment Help
Economics Assignment Help
Finance Assignment Help
Statistics Assignment Help
Physics Assignment Help
Chemistry Assignment Help
Math Assignment Help
Biology Assignment Help
English Assignment Help
Management Assignment Help
Engineering Assignment Help
Programming Assignment Help
Computer Science Assignment Help
IT Courses and Help
Why Us ?
~24x7 hrs Support
~Quality of Work
~Time on Delivery
~Privacy of Work
Human Resource Management
Literature Review Writing Help
Follow Us |
T & C
Copyright by ExpertsMind IT Educational Pvt. Ltd.