3 . Here is some data for three firms in the restaurant industry: Firm #1: $100

Question

3. Here is some data for three firms in the restaurant industry:

Firm #1: $100 million in debt, $200 million in equity, current estimated equity beta of 3.0

Firm #2: $200 million in debt, $200 million in equity, current estimated equity beta of 3.0

Firm #3: $300 million in debt, $100 million in equity, current estimated equity beta of 4.0

There are no corporate or personal taxes         

(a)        For each firm, calculate bunlevered

(b)        Using your answer in part (a), what would you predict the equity beta to be for a firm in the restaurant industry with $300 million in debt and $600 million in equity?

Explanation / Answer

a) bunlevered 1 = 3/(1+100/200) = 2

beta unlevered (2) = 3/(1+200/200) = 1.5

beta unlevered (3) = 4/(1+300/100) = 1

b.) beta unlevered =1.5

beta equity = 1.5*(1+300/600) = 1

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