Question 4. Beta and Cost of Capital DLT Inc. is a private company and has two lines of business: Oil&Gas and Energy Management, with 70% of the firm's sales generated by the Oil&Gas division. DLT has a target capital structure of 20% debt financing (D/V = 20%). The following table shows the financials of selected comparable companies (in $mm). Oil & Gas Industry Energy Management Industry S&P500 Index 50-50 portfolio 70-30 Portfolio 70% in Oil&Gas Company EM Yes Target capital structure Tax Rate D/ Company OG No 40% 40% 40% 10% Debt Beta Equity Beta 7% Standard Deviation of D 10% monthly stock returns over latest 3 years *Note: Generally we select more than one comparable companies in each industry, to reduce the error and noise in estimation. Additional market data and information: The 3-month Treasury bill yield is 2%. The 10-year Treasury note yield is 3%. The market risk premium is 6%. The marginal tax rate is 21%. (1) Use the following numbers to fill in the missing standard deviations of stock returns in the last row of the table; match the appropriate standard deviation with the security / portfolio. 5% 9% 12% (2) Calculate the asset beta and total beta of company OG and DLT. (3) Calculate the unlevered cost of capital (or unlevered cost of equity), cost of equity and cost of undiversified equity of DLT. Question 4. Beta and Cost of Capital DLT Inc. is a private company and has two lines of business: Oil&Gas and Energy Management, with 70% of the firm's sales generated by the Oil&Gas division. DLT has a target capital structure of 20% debt financing (D/V = 20%). The following table shows the financials of selected comparable companies (in $mm). Oil & Gas Industry Energy Management Industry S&P500 Index 50-50 portfolio 70-30 Portfolio 70% in Oil&Gas Company EM Yes Target capital structure Tax Rate D/ Company OG No 40% 40% 40% 10% Debt Beta Equity Beta 7% Standard Deviation of D 10% monthly stock returns over latest 3 years *Note: Generally we select more than one comparable companies in each industry, to reduce the error and noise in estimation. Additional market data and information: The 3-month Treasury bill yield is 2%. The 10-year Treasury note yield is 3%. The market risk premium is 6%. The marginal tax rate is 21%. (1) Use the following numbers to fill in the missing standard deviations of stock returns in the last row of the table; match the appropriate standard deviation with the security / portfolio. 5% 9% 12% (2) Calculate the asset beta and total beta of company OG and DLT. (3) Calculate the unlevered cost of capital (or unlevered cost of equity), cost of equity and cost of undiversified equity of DLT
