“Bottom Up Beta’s” and Beta’s for private businesses…

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Presentation transcript:

“Bottom Up Beta’s” and Beta’s for private businesses… Session 3 MOOC– CORP FINC 5880 Shanghai 2015 IMBA

If you don’t use it you loose it!

Top down or bottom up?

Regression Beta’s

Diversifiable risk…

Let’s do the regression for Disney…

Monthly data…

Recent Disney…

The regression…

Quick Test…

How Professionals work…

Regression Output…

Interpreting the results…

So what’s the true value of regression beta’s ?

High Beta…Low Beta...

What determined a Beta?

Industry Beta’s

Operating Leverage…

Financial leverage (HAMADA)

For Disney recently…(2013)

Before we start… What is the beta of cash? So the more cash a company has the higher/lower it’s beta? Say: Beta (microsoft)= Beta cash* (cash/firm value) + beta software business *(firm value-cash)/firm value Or say Beta microsoft is 1.10 what is the beta of the software business? If microsoft holds 20% of its value in cash and cash equivalents? 1.10= 0* 20% + Beta software business*80% thus Beta software business= 1.10/0.8=1.375…

Let’s do this for Apple Inc. Cash/Mkt Sec totals $ 155 B USD Apple’s overall Beta is reported at 1.03 Apple’s Value 638 B USD What is Apple’s real Business beta? 1.03= 155/638*beta cash+(638-155)/638* business beta THUS Since the beta of cash=0 it follows: 1.03=0.76*business beta THUS Apple’s business beta is: 1.03/0.76= 1.36….

The effect of taking samples: Statistics: The STDEV of a BLUE estimator can be reduced to 1/√n with n being the sample size: Sample size STDEV reduction to: 4 50% 9 33.33% 25 20% 100 10$ 10,000 1% 1,000,000 0.1%

Or… +5 +16 +75 +9900

Illustrated…

Weighting with each business…

So each business it’s own WACC%

DEMO…of how you should build your spread sheet for your homework

Disney recently (2013)

Disney by segment 2013

Attempt to allocate debt…

Beta’s for private companies…

So come up with a WACC% ?

Session 3: Beta assignment… Try to find a Bottom up beta for your company following the methodology in these slides Note; a sample of 9 firms per segment is enough…