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 valuecash)/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….
TRY: Updated for the latest Balance sheet
•
•
Firm Value: 674.17B+53.46B=$ 727.64B USD
Cash 21.12 B+20.48B+164.07B=$ 205.67B USD
•
Reported all in Beta: 1.00…
•
Apple’s Unlevered Business Beta?
•
NOTE: Unlever with HAMADA and correct for
cash...
•
Assume tax rate: 35%
Answer Apple Inc’s unlevered
Business beta
• Unlever with Hamada: B(u)=B(l)/(1+D/E(1-t))
• Unlevered incl. cash:
• 1.00/1.0515=0.951
• Thus:
• 0.951=468.5B/727.6B*Business Beta + 205.7/727.6B*Beta
cash (zero)=
• It follows Business Beta Apple INC. (unlevered and
corrected for cash) is: 0.951/0.6439= 1.48
• Apple is becoming a more “risky” business…but it is not
easy to determine this from the reported Beta...
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…
Sample size and STDEV
60%
50%
40%
Sample size and STDEV
30%
20%
10%
0%
4
9
+5
25
+16
100
+75
10000
+9900
1000000
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…
Class Assignment Yahoo-MSFT
Answer Yahoo MSFT case
Apple iTV case
Answer Apple iTV case