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Title: Galt Industries has a market capitalization of $50 billion, $30 billion in BBB rated debt, and $8 ... Post by: Memphic on Nov 20, 2017 Galt Industries has a market capitalization of $50 billion, $30 billion in BBB rated debt, and $8 billion in cash. If Galt's equity beta is 1.15, then Galt's underlying asset beta is closest to:
A) 0.83 B) 0.92 C) 1.00 D) 1.15 Title: Re: Galt Industries has a market capitalization of $50 billion, $30 billion in BBB rated debt, and ... Post by: deusmaroto on Nov 20, 2017 A
Explanation: A) We can think of Galt's business assets as a portfolio of equity, plus debt, and less cash. Assuming the beta of cash investments is zero: βU = βE + βD + βC = × 1.15 + × 0.10 - × 0.0 = 0.84 Alternatively, we estimate Galt's asset beta based on its net debt of 30 - 8 = 22 m. Using net debt: βU = βE + βD = × 1.15 + × 0.10 = 0.829 Note that both answers are quite similar. The second approach presumes that Galt's cash reduces the average market risk of its debt (as thought Galt used its cash to repay its senior debt). |