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

Implementing systems effectively, Implementing Systems Effectively: Muc...

Implementing Systems Effectively: Much of the accounting process has been taken over by office automation systems. Whereas once the vast majority of bookkeeping and reporting t

What are the types of major types of finance companies, What are the types ...

What are the types of major types of finance companies? There are three main types of finance companies: a. Sales finance institutions which make loans to customers of a cer

Capital market-secondary market, Secondary Market The secondary market ...

Secondary Market The secondary market is also referred to as the stock market where dealings in shares are taken up. It helps the shareholders to find buyers for trading. Thus,

Types of government stocks, Types of Government Stocks Issue of Stock t...

Types of Government Stocks Issue of Stock through AuctionThe RBI, on behalf of the government, issues notification to auction government securities, stating the amount and time

Explain the risk–return relationship, Explain the risk–return relationship ...

Explain the risk–return relationship The relationship among the risk and required rate of return is termed as the risk–return relationship.  It is a positive relationship since t

Price-yield relationship of a callable bond, The price-yield relation...

The price-yield relationship of a non-callable or a non-putable bond is convex because price and yield are inversely proportional. Figure 1 shows the price-yield

Risk and advantages associated with company locations, What are some of the...

What are some of the primary advantages when a corporation has operations in countries other than its home country?  What are some of the risks? Foreign operations may decrease

Analyze the corporate financial statements, You are currently an Analyst wo...

You are currently an Analyst working for a finance publication firm and as part of your responsibilities; you are required to provide a monthly forecast and analysis of certain com

Explain about the primary and secondary markets, Explain about the primary ...

Explain about the primary and secondary markets. Primary and secondary markets: A primary market is a financial market wherein new matters of financial securities (both s

Define inventory is sometimes thought of as a necessary evil, Inventory is ...

Inventory is sometimes thought of as a necessary evil.  Explain. Inventory ties up funds and these types of funds are not earning an explicit return.  A few inventory is often es

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