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

2. If you don’t use it you loose it!

3. Top down or bottom up?

4. Regression Beta’s

5. Diversifiable risk…

6. Let’s do the regression for Disney…

7. Monthly data…

8. Recent Disney…

9. The regression…

10. Quick Test…

11. How Professionals work…

12. Regression Output…

13. Interpreting the results…

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

15. High Beta…Low Beta...

16. What determined a Beta?

17. Industry Beta’s

19. Operating Leverage…

20. Financial leverage (HAMADA)

21. For Disney recently…(2013)

22. 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…

23. 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* 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….

24. 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%

25. Or… +5
+16
+75
+9900

26. Illustrated…

27. Weighting with each business…

28. So each business it’s own WACC%

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

30. Disney recently (2013)

31. Disney by segment 2013

32. Attempt to allocate debt…

33. Beta’s for private companies…

34. So come up with a WACC% ?

35. 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…