equity, debt and asset betas股票，债券和资产贝塔.doc

Equity, Debt and Asset Betas Ct is not known for certain. It is a random variable. It has a probability distribution with a mean and standard deviation. Ct = E(Ct) = expected cash flow “r” is the appropriate cost of capital. It should have the same riskiness as Ct If Ct is a normal extension of the firm’s operations, and the firm is entirely equity financed, we use the stockholders’ required return as found through the CAPM for the appropriate value of ‘r’. E(Ri) = Rf + (i (Rm – Rf) Remember: the Beta of security i is the standardized covariance of its returns with the returns on the market portfolio. (i = Covi,Mkt (2Mkt Some Determinants of Beta 1. Cyclicality of revenues – How responsive are revenues to changes in the business cycle? Does the firm produce normal goods or inferior goods? Highly cyclical ( high covariance with the market ( higher beta. 2. Operating Leverage (Degree of Operating Leverage) – Degree to which costs are fixed. High FC relative to VC ( high operating leverage Contribution margin = Price – VC = incremental profit from an additional sale Low Contribution margin = low FC high VC = low DOL – example is grocery store High Contribution margin = high FC low VC = high DOL – example is airline High Operating Leverage ( profits are more responsive to changes in sales ( higher beta 3. Financial Leverage – similar to operating leverage if we think of debt as a FC (Equity = Equity beta = beta of a firm’s stock. This is what we have been measuring and looking at thus far. It is a measure of both the firm’s business risk and its financial risk. (Asset = Asset beta = weighted average of the betas of all a firm’s securities (common stock, debt and preferred stock – but we will assume the firm has no preferred stock). This is a measure of the firm’s business risk only. It is a measure of the riskiness of the business without including the riskiness of the firm’s financing choice. (Asset = Debt ((D) + Equity ((E) D+E