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

Calculate the total cashflows, Calculate the Total Cashflows from 2007 - 20...

Calculate the Total Cashflows from 2007 - 2011.  Suppose that the company will require to increase their annual investment in fixed assets (representing new equipment) at the simil

Finance for managers, Before tax cost of debt and after tax cost of debt; ...

Before tax cost of debt and after tax cost of debt; Personal finance problem. David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following inform

Explain the asset substitution effect, Question: a. Explain what the de...

Question: a. Explain what the debt overhang problem is (following the lines of Myers 1977) make sure that you specify what the relevant conflict of interest is and what are the

Shareholders versus managers, Shareholders versus Managers A Limited Li...

Shareholders versus Managers A Limited Liability company is possessed by the shareholders though in most of the cases is managed by a board of directors selected by the shareho

Placement on career path, Placement on career path: The next step of t...

Placement on career path: The next step of the career planning process is to place an individual on a chosen career path. A career path is the logical possible sequence of pos

Accrued income, Income that is received in a fund or by company by providin...

Income that is received in a fund or by company by providing a service or selling a product, but still has to be received. Mutual funds or other pooled assets that build up income

Chi square distribution, Chi Square Distribution If the difference betw...

Chi Square Distribution If the difference between actual and the expected frequencies is zero, the sampling distribution of the chi square statistic c 2  will be identical to a

Application of concept of tvm, Q. Application of concept of TVM Sometim...

Q. Application of concept of TVM Sometime the financial manager has to deal with the varying situation of the decision making where the concept of TVM needs to be applied in th

Working capital managment policies, types of working managment policies

types of working managment policies

Required rate of return , Required Rate of Return (R i )  The required...

Required Rate of Return (R i )  The required rate of return (Ri) is the minimum rate of return that a project must generate if it has to receive funds.  It’s thus the opportun

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