Kinectica, Inc. is evaluating a project for manufacturing electronic game contro

Question

Kinectica, Inc. is evaluating a project for manufacturing electronic game controllers. This firm is financed with 40% debt and 60% common stock. Kinectica wishes to estimate the cost of equity for the game controller project. The finance staff has found two single-product public companies that are in the game controller manufacturing business. Company A has a beta of 1.25 and a debt/equity ratio of 1.0. Company B has a beta of 1.6 and a debt/equity ratio of 2.0. Estimate a beta coefficient for Kinectica. Adjust for leverage differences between the single product companies and Kinectica. Assume the corporate tax rate is 0% and the debt beta is .3.

Explanation / Answer

Let Equity beta of company A & Company B be x and Debt beta of company A & Company B be y Company A's Beta =1.25 (given) Company B's Beta =1.60 (given) formula for Beta of company = Weight of Equity * Equity Beta + Weight of Debt * Debt Beta Therefore, Equation of company's A Beta will be 0.5x + 0.5y =1.25.............................................................(i) Similarly, Equation of company's B Beta will be 1/3x+2/3x =1.60 By solving Simultaneous equation We get, X= 0.20 and Y = 2.30 Equity Beta= 0.20 Hence, For Kinectica The Beta of the Kinectica's company = 0.60 * 0.20 + 0.40 * 0.30 = 0.24 (Ans)

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.