Lecture 8 More on cost of capital.pdf

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1、MOREONCOSTOFCAPITAL1EstimationofBetaCov(R,R)iMβ=Var(R)M•Problems1.Betasmayvaryovertime.2.Thesamplesizemaybeinadequate.3.Betasareinfluencedbychangingfinancialleverageandbusinessrisk.•Solutions–Problems1and2canbemoderatedbymoresophisticatedstatisticaltechniques.–P

2、roblem3canbelessenedbyadjustingforchangesinbusinessandfinancialrisk.–Lookataveragebetaestimatesofcomparablefirmsinthe4industry.UsinganIndustryBeta•Itisfrequentlyarguedthatonecanbetterestimateafirm’sbetabyinvolvingthewholeindustry.•Ifyoubelievethattheoperationsof

3、thefirmaresimilartotheoperationsoftherestoftheindustry,youshouldusetheindustrybeta.•Ifyoubelievethattheoperationsofthefirmarefundamentallydifferentfromtheoperationsoftherestoftheindustry,youshouldusethefirm’sbeta.•Donotforgetaboutadjustmentsforfinancialleverage.

4、5Beta,CovarianceandCorrelationCov(Ri,RM)σ(Ri)β==ρi2σ(R)σ(R)MM•Betaisqualitativelysimilartothecovariancesincethedenominator(marketvariance)isaconstant.•Betaandcorrelationarerelated,butdifferent.Itispossiblethatastockcouldbehighlycorrelatedtothemarket,butitcouldha

5、vealowbetaifitsdeviationwererelativelysmall.•Itisalsopossiblethatastockhasalargestandarddeviationbutasmallbeta,becauseitsmovementisnotsomuchcorrelatedwiththemarket.6Beta:ExploringFundamentals7DeterminantsofBeta•BusinessRisk–CyclicalityofRevenues–OperatingLeverag

6、e•FinancialRisk–FinancialLeverage8Determinant1:ProductType•IndustryEffects:Thebetavalueforafirmdependsuponthesensitivityofthedemandforitsproductsandservicesandofitscoststomacroeconomicfactorsthataffecttheoverallmarket.–Cyclicalcompanieshavehigherbetasthannon-cyc

7、licalfirms:High-tech,retailers,andautomotivefirmsutilities,railroads,andfood.Whataboutthemovieindustry?9CyclicalityofRevenues•Highlycyclicalstockshavehigherbetas.–Empiricalevidencesuggeststhatretailersandautomotivefirmsfluctuatewiththebusinesscycle.–Transportati

8、onfirmsandutilitiesarelessdependentonthebusinesscycle.•Notethatcyclicalityisnotthesameasvariability—stockswithhighstandarddeviationsneednothavehighbetas.–Moviestudios