Customer Service Chat
Get quote & make Payment
Working Capital Management, Financial 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 2:53:53 AM | Location : Kenya
Ask an Expert
Working Capital Management, Assignment Help, Ask Question on Working Capital Management, Get Answer, Expert's Help, Working Capital Management Discussions
Write discussion on Working Capital Management
Your posts are moderated
Write your message here..
Cost of equity capital, What is Cost of Equity Capital? Describe please.
What is Cost of Equity Capital? Describe please.
State about the two types of government securities, State about the two typ...
State about the two types of Government Securities There are two types of Government Securities which are offered: Government Floating Rate Bonds which pay a floating rate
Financial systems, Financial Systems: The overall financial management ...
Financial Systems: The overall financial management framework will include a number of elements such as: Financial systems designed to capture the details of each financ
Fiancial management, Ashok is to receive an amount of Rs. 15,00,000 from hi...
Ashok is to receive an amount of Rs. 15,00,000 from his relative after 3 years. He wants to buy a house for which he wants the money to be paid now. His relative had al
State about the detection risk, State about the Detection risk This is ...
State about the Detection risk This is the risk that auditors 'substantive procedures don't detect a material misstatement in an account balance or class of transactions. It is
What is the primary assumption behind experience approach, What is the prim...
What is the primary assumption behind the experience approach to forecasting? The experience act to forecasting is based on the assumption that things will happen a certain way
Strategic management, Develop and implement strategic plan using bounce fit...
Develop and implement strategic plan using bounce fitness as case study
Primary market, Primary Market In an economy, at a given point of time, ...
Primary Market In an economy, at a given point of time, there will be people/entities called savers the surplus units, whose current income exceeds their current expenditure whi
Explain the structure of main financial statement, Citilink has just comple...
Citilink has just completed its 2010/11 management accounts. The directors are going to review the financial statements in the next board meeting. You have to prepare a FINANCIAL
Cash deficit - cash budget, In two of the four months of the cash budget Th...
In two of the four months of the cash budget Thorne Co has a cash shortage with the highest cash deficit being the opening balance of $40000. This cash shortage which has occurred
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
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.