User Account

All Pages

Working Capital Management, Financial Management

Assignment Help:
The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would be inappropriate to estimate beta from the actual share price behavior over such a short period. Instead it is proposed to ascertain, and where necessary adjust, the observed equity betas of other companies operating in the same industry, and with the same operating characteristics as Nelson, as these should be based on similar levels of systematic risk and be capable of providing an accurate estimate of Nelson’s beta

Three companies have been identified as firms having operations in the same industry as Nelson with identical operating characteristics. However, only one company, Oak plc, operates exclusively in the same industry as Nelson. The other two companies have some dissimilar activities or opportunities in additional to those which are the same as those of Nelson.

Details of the three companies are as follows;

a. Oak plc has an observed equity beta of 1.12. The capital structure at market value is 60% equity, 40% debt.

b. Beech plc has an observed equity beta of 1.11. It is estimated that 30% of the current market value of Beech is caused by risky growth opportunities which have an estimated beta of 1.9. The growth opportunities are reflected in the observed beta. Beech’s other activities are the same as Nelson’s. Beech is financed entirely by equity.


c. Pine plc has an observed equity beta of 1.14. Pine has two divisions, East and West. East’s operating characteristics are considered to be identical to those of Nelson. The operating characteristics of West are considered to be 50% more risky than those of East. In terms of financial valuation East is estimated as being twice as valuable as west. The capital structure of Pine at market values is 75% equity, 25% debt.

Nelson is financed by equity. The tax rate is 40%.

Required

a. Assuming all debt is virtually risk-free, make three estimate of the equity beta of Nelson plc. The three estimates should be based, separately, on the information provided for Oak, Beech and Pine.

b. Explain why the estimated beta of Nelson, when eventually determined from observed share price movements, may differ from the value derived from the approach in (a) above.

c. State the reason why a company has a very volatile share price and is generally considered to be extremely risky can have a lower beta value, and therefore lower financial risk, than an equally geared firm whose share price is much less volatile.

Related Discussions:- Working Capital Management

What is the expected return of cinderella''s portfolio, Question: Cinde...

Question: Cinderella invests the following sums of money in common stocks having the expected returns as detailed below: (a) What is the expected return of Cinderella's por

Evaluate the initial exchange of cash, Consider a currency swap in which th...

Consider a currency swap in which the domestic party pays a fixed rate in foreign currency, the UK pounds sterling, and the counterparty pays a fixed rate in US Dollars. The not

Steps, how control the steps

how control the steps

What is bid, Bid The price buyers provide to acquire securities or pri...

Bid The price buyers provide to acquire securities or privacy from sellers.

Stock valuation, I just purchased a stock that would pay the dividends of t...

I just purchased a stock that would pay the dividends of the first four years as D1 = $0.65, D2 = $0.74, D3 = $0.79, D4 = $0.84. I also told that the dividends would grow continual

Explain about the investment decision- financial management, Explain about ...

Explain about the investment decision- financial management The investment decision relates to selection of assets in which funds would be invested by a firm. Assets which can

Project on investment banking house, The Project to be Addressed by the Pap...

The Project to be Addressed by the Paper: You have just graduated from CCI's MBA program and have secured a position as a fund manager for a well known investment banking house

Different cost of capital with changed proportions, Different Cost of Capit...

Different Cost of Capital with Changed Proportions: It is quite possible that the specific costs of capital of different sources may be affected by the amount of funds' raised and

Financial control and control of working capital, a) Sponsorship - refers t...

a) Sponsorship - refers to monetary gifts or donations in support of a business or an event venture in return for a dominant display of the sponsor's name. In this case, FC Barcelo

Differentiate between systematic and unsystematic risk, QUESTION a) Dis...

QUESTION a) Discuss the importance of diversification in the context of stock markets using appropriate numerical illustrations. b) Mimine and Minush are two companies with

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd