Consider the following information regarding corporate bonds: Rating AAA AA A BB

Question

Consider the following information regarding corporate bonds:

Rating

AAA

AA

A

BBB

BB

B

CCC

Average Default Rate

0.0%

0.0%

0,2%

0,4%

2.1%

5.2%

9.9%

Recession Default Rate

0.0%

1.0%

3.0%

3.0%

8.0%

16.0%

43.0%

Average Beta

0.05

0.05

0.05

0.10

0.17

0.26

0.31

Company

Market Capitalisation ($mm)

Total Enterprise Value ($mm)

Equity Beta

Debt Rating

Taggart Transcontinental

$4,500

8,000

1.1

BBB

Rearden Metal

$3,800

7,200

1.3

AAA

Wyatt Oil

$2,400

3,800

0.9

A

Nielson Motors

$1,500

4,400

1.75

BB

Your estimate of the asset beta for Nielson Motors is closest to:

a.) 0.59

b.) 0.71

c.) 0.66

d.) 0.42

Rating

AAA

AA

A

BBB

BB

B

CCC

Average Default Rate

0.0%

0.0%

0,2%

0,4%

2.1%

5.2%

9.9%

Recession Default Rate

0.0%

1.0%

3.0%

3.0%

8.0%

16.0%

43.0%

Average Beta

0.05

0.05

0.05

0.10

0.17

0.26

0.31

Explanation / Answer

Calculate Debt to Equity Ratio for Nielson Motors from the information given.

Market Cap is given as 1500, and EV is given as 4400, So total debt of this company is 4400 - 1500 = 2900

So Debt / Equity Ratio = 2900 / 1500 = 1.93

Since the debt rating is given as BB, its average beta would be 0.17

Equity beta is given as 1.75

So Asset Beta would be = (2900 / 4400) * 0.17 + (1500 / 4400 ) * 1.75 = 0.11 + 0.60 = 0.71

So option b is the correct answer

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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