You estimated the beta of company XYZ\'s stock using the following linear regres

Question

You estimated the beta of company XYZ's stock using the following linear regression model: (Ri -rf)=ai+ bi (R_Mkt - rf) + ei The summary output from your regression is shown below: SUMMARY OUTPUT Company XYZ's closing stock price is exist10 and number of shares outstanding is 300 million as of 29th Oct 2015. Company XYZ and Company ABS run similar businesses but differ in leverage. XYZ's latest balance of interest bearing debt is exist150 million and that of cash and cash equivalent is exist250 million. Company ABS is not listed and it intends to main a leverage ratio of 10% (net debt/(net debt + market capitalisation)). Use the above information to estimate the equity beta of Company ABS. The equity beta of Company ABS is: A 0.58 B. 0.72 C. 0.85 D. 4.45 E. None of the above is correct.

Explanation / Answer

Ans- Beta (equity) = Beta (asset) × [1+ [(1-t)*D/E]]

= 0.7418× (1+[1-10%]×150/250)

= 1.142372

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