Question
You have a new start-up firm. You think that the value of your start-up is around $60 million, but you will need to do a
You have a new start-up firm. You think that the value of your start-up is around $60 million, but you will need to do a serious NPV analysis before you know the precise value. You are planning to have a 50% debt-to-value ratio, and that you will continuously rebalance to maintain this leverage. You have information on two other companies. The names of these companies are “Comp A” and “Comp B”. Comp A has the same business risk as your start-up but different financial leverage. Comp A is continuously rebalancing its leverage to maintain a 30% debt-to-value ratio. Comp A’s equity beta is 1.5 and the debt beta is 0.5.
CompA’s most recent annual sales figure was $3 million. Comp A’s total market value (debt + equity) is $10 million. Comp B has the same leverage as your start-up (50% debt-to-value ratio) and operates in a different line of business than your start-up.
Comp B is also continuously rebalancing its leverage. Comp B’s equity beta is 2 and the debt beta is 0.7. CompB’s most recent annual sales figure was $8 million. Comp B’s total market value (debt + equity) is $60 million. The market risk premium is 10% and the risk free rate is 3%.
The tax rate is 30%. Your cost of debt (expected return on debt) will be 4%.
What is your best estimate for the equity beta of your start-up?
What is the WACC for your start-up?
Step by Step Solution
3.23 Rating (147 Votes )
There are 3 Steps involved in it
Step: 1
The market risk premium 10 The risk free rate 3 The tax rate 30 Cost of debt 4 Comp A Debttovalue ra...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started