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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)

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Anon

Lvl 1
5y ago
Updated: 11/7/2022

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.

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Related Questions

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How can one determine the Weighted Average Cost of Capital (WACC) for a company"?

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How can a company determine its weighted average cost of capital (WACC)?

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How do you find the weighted average cost of capital at various combinations?

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