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How do you calculate the asset beta, equally weighted asset beta and cost of capital equity for 3 given firms?
An equity analyst needs to estimate the beta of the restaurant business in the UK. She gathers data on three companies that own and manage pubs, bars and restaurants in the country, namely, the Restaurant Group (whose main brand is Frankie & Benny’s), Mitchells & Butlers (which owns brands such as Toby Carvery and All Bar One) and Wetherspoon PLC. These companies’ betas and capital structures, obtained from the Bloomberg terminal, are as follows: Restaurant Group has an equity beta of 1.47 and is financed 50% by debt and 50% by equity. Its equity market capitalisation is 700m GBP. Mitchells & Butlers has an equity beta of 0.21 and is financed 40% by debt and 60% by equity. Its equity market capitalisation is 1.9b GBP. Wetherspoon has an equity beta of 0.80 and is financed 30% by debt and 70% by equity. Its equity market capitalisation is 1.7b GBP. Assume that the risk-free rate of return is 2% per year, and that the equity risk premium is 5.5% per year. Assume also that all the companies pay tax at an effective rate of 20% per year. a) Calculate the asset betas for the three companies. (10 marks) b) Calculate an equally weighted average asset beta using your results from part (a). (10 marks) c) A private equity firm is considering investing in a chain of UK restaurants that is currently 100% owned by an entrepreneur. The firm expects to finance 90% of the acquisition with debt. Using your weighted average beta estimate from part (b) and an effective tax rate of 10%, estimate the cost of equity capital for this acquisition. (10 marks)
Anon
Unlevered Beta (Asset Beta) is the volatility of returns for a business, without ... In other words, it's a measure of risk and it includes the impact of a company's capital structure ... Finally, you can use this Levered Beta in the cost of equity calculation.
Ephraim Armstrong
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If a company's debt is low does marginal cost of capital apply?
Weighted average cost of capital includes cost of debt and cost of equity. Thus irrespective of existing proportion of debt and equity, the marginal cost is always applicable.
How to calculate capital charge?
To calculate capital charge, you can use the formula: Capital Charge = Cost of Equity × Equity + Cost of Debt × Debt. Cost of equity is usually estimated using the Capital Asset Pricing Model (CAPM) or Dividend Discount Model (DDM), while cost of debt is based on the interest rate on debt. By multiplying the respective cost by the amount of equity and debt, you can determine the capital charge.
Is it better to use book value versus market values of debt and equity rather than book values to calculate a firms Weighted Average Cost of Capital?
HIII. I am taking accounting and in my opinion market values of debt is way better to calculate a firms weight average cost of capital... hope i helped even just a little
How do you calculate owner's capital?
Answer:The owner's capital (or: equity) is the residual claim. It is calculated as assets minus liabilities.
Why does the weighted average cost of capital of firms that uses more debt capital lower that that of a firm that uses less debt capital?
Because the cost of debt is generally lower than the cost of equity. This is because in case of financial distress, debt-holders are repaid before the equity holders are, as well as because debt has the assets of the firm as collateral and equity does not.
How do you find the weighted average cost of capital at various combinations?
Weighted Average Cost Of Capital - WACC A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing: Where Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Weighted Average Cost Of Capital - WACC A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing: WACC= E/V * Re + D/V* Rd*(1-Tc) Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate
What is good debt to eqity ratio?
Good debt to equity ratio would be where your Weighted Average Cost of Capital is minimum. You can also see industry standards.
How do you calculate the after tax cost of financing?
THE TARGET CAPITAL STRUCTURE FOR QM IS 43% COMMON STOCK, 13% PREFERRED STOCK, AND 44% DEBT. iF THE COST OF COMMON EQUITY FOR THE FIRM IS 18.6%, THE COST OF PREFERRED STOCK IS 10.4%, AND THE BEFORE TAX OF DEBT IS 7.8%, AND THE FIRM RATE IS 35%. What is QM's weighted average cost of capital?
How do you calculate the after-tax cost of financing?
THE TARGET CAPITAL STRUCTURE FOR QM IS 43% COMMON STOCK, 13% PREFERRED STOCK, AND 44% DEBT. iF THE COST OF COMMON EQUITY FOR THE FIRM IS 18.6%, THE COST OF PREFERRED STOCK IS 10.4%, AND THE BEFORE TAX OF DEBT IS 7.8%, AND THE FIRM RATE IS 35%. What is QM's weighted average cost of capital?
What is the WACC of RIL?
WACC is defined ( Weighted average cost capital ) Discount Rate. Cost of equity ( CAPM ) * Common Equity + ( cost of debt) * total debt. Calculation of formula results in input for discounted cash flow.
Types of working capital?
Equity Capital,Debt Capital,Specialty Capital,Sweat Equity
What is the equity to assets ratio?
This ratio refers how much amount invested for fixed assets from equity. Formula for calulating this ration:- Fixed Assets/Equity(Capital+Reserves+Other accumilated Profits) If the Ratio is .75 ie 75%of Equity spend for Fixed Assets, Hence we can calculate working Capital of the Company
