Re: 5 smester BBI question papers
Calculating raw betas from historical returns and even projected betas is an imprecise measurement of future
beta because of estimation errors (i.e. standard errors create a large potential range for beta). As a result, it is
recommended that we use an industry beta. Of course, since the betas of comparable companies are distorted
because of different rates of leverage, we should unlever the betas of these comparable companies as such:
beta-Unlevered = beta(Levered) / [1+ (Debt/Equity) (1-T)]
Then, once an average unlevered beta is calculated, relever this beta at the target company s capital structure:
beta-Levered = beta-(Unlevered) x [1+(Debt/Equity) (1-T)]
:SugarwareZ-208: