Question
Ken needs to estimate the beta for his firms pharmacy division to ultimately calculate a WACC for this division. The division has a: weight of
Ken needs to estimate the beta for his firms pharmacy division to ultimately calculate a WACC for this division. The division has a: weight of equity = 80.0%; weight of debt = 20.0%; and tax rate = 13.5%. Ken has identified 3 peer firms and found their betas, tax rates, and weights of debt and equity:
Company | Beta | Tax Rate | Weight of Equity | Weight of Debt |
A | 0.99 | 19.8% | 54.8% | 45.2% |
B | 1.75 | 13% | 12.6% | 87.4% |
C | 1.66 | 16.3% | 64.7% | 35.3% |
Ken knows that to estimate a divisional beta he will have to:
1. Unlever the betas of the 3 peer firms using equation 15-12 (in the text and the module 8 supplement)
2. Take an average of the 3 unlevered betas.
3. Re-lever the average beta based on the divisions weights of equity and debt as well as the tax rate.
Based on the information above, what is the beta that Ken should use for the beta for his division?
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