Computation of beta and asset beta

Assignment Help Finance Basics

Reference no: EM1316736

The following table lists possible rates of return on Compton Technology\'s stock and debt and on the market portfolio. The probability of each state is also listed.

a. What is the beta of Compton Technology debt?

b. What is the beta of Compton Technology stock?

c. If the debt-to-equity ratio of Compton Technology is 0.5, what is the asset beta of Compton Technology? Assume no taxes.

		Return on	Return on	Return on the
State	Probability	Stock (%)	Debt (%)	Market (%)
1	0.1	3%	8%	5%
2	0.3	8	8	10
3	0.4	20	10	15
4	0.2	15	10	20

Note: First, calculate the expected return on Compton's stock. Then, calculate the expected return on Compton's debt. Calculate the expected return on the market. Calculate the covariance of the stock's return with the market's return. Calculate the covariance of the debt's return with the market's return. Calculate the market variance.

Part a: Calculate the beta of Compton Technology's debt by dividing the covariance of the debt's return with the market's return by the variance of the market.

Part b: Calculate the beta of Compton Technology's stock by dividing the covariance of the stock's return with the market's return by the variance of the market.

Part c: Calculate the equity to value ratio [S / (S+B)] and the debt to value ratio [B / (S+B)] by substitution. When there are no taxes, the asset beta is equal to the weighted average of the stock beta and the debt beta. Let me know if any question.

Reference no: EM1316736

Questions Cloud

Steps for constructing the control chart : Place the steps below in the correct order for the construction of a control chart.

Confidence in our estimate of the percent of adults : Findout the margin of error for this survey if we want a 99 percent confidence in our estimate of the percent of adults over 50 who take vitamin supplements.

Determining the variance of data : Determine the variance of X? (Illustrate your computation either in Table or in Equation form)

Computing effect on firm optimal output : Making dresses is a labour-intensive process. Indeed, the production function of a dress-making firm is well described by the equation Q = L - L 2 /800, where Q denotes the number of dresses per week and L is the number of labour-hours per week.

Computation of beta and asset beta : Computation of beta and asset beta and compute the beta of Compton Technology's debt by dividing the covariance of the debt's return

Assume all the possible random samples : If we assume all the possible random samples of 250 students at this university, 95 percent of the samples should have means among what two numbers.

Challenges for enterprise system integration : State and discuss the challenges legacy systems pose for the enterprise system integration. Give specific examples in order to support your response.

Describing optimal solution and objective function : Solve problem graphically1. Describe optimal solution and objective function value in context of the problem.

C program to implement sieve of erastosthenes : Prepare a C program which implements the Sieve of Erastosthenes and determines the primes among the first N integers that you enter through a prompt or the command line.

User Account

All Pages