Question:

Company: Microsoft (MSFT)

1. Using Comparable Companies to estimate Betas (Bottom up Betas)

• Collect a group of publicly traded comparable firms, preferably in the same line of business, but more generally, affected by the same economic forces that affect the firm being valued.
  1. Choose comparable companies, and estimate a business beta for each component
  2. Estimate the average beta for the publicly traded comparable firms.
  3. Estimate the average market value debt-equity ratio of these comparable firms and calculate the unlevered beta for the business.
  4. b_unlevered = b _levered / (1 + (1 - tax rate) (Debt/Equity))
  5. Using the current leverage of the company, estimate a levered beta for the company

Comparable Companies: Apple (AAPL), IBM, Cisco (CSCO)