Ameritrade Case

Some modifications of the beta coefficient are the adjusted beta and the fundamental beta. The former tries to transform the historical beta closer to an average beta of 1.0. The latter seeks to incorporate information concerning the company to achieve a better estimate for beta. Moreover, beta values out of less-developed financial markets are not good estimates and therefore partly biased. Problems in estimating beta for divisions of a corporations could arise if the divisions are too small and therefore can be compared with less-developed financial markets. Hence, beta coefficients could be biased (Brigham & Daves, 2007).

The regression that we performed in excel for both stocks yielded a beta of .73576 for Reynolds, and a beta of 1.4198 for Hasbro. In question 2 we learned that although Reynolds stock was riskier independently, adding it to the portfolio made it more diversified compared to adding Hasbro, due to the fact that it was less correlated to the market portfolio. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Therefore, since the beta of Reynolds is lower than Hasbro, our beta calculations align with the fact that Reynolds stock makes the overall portfolio less risky. This finding is also intuitive when considering the nature of the companies; Reynolds is a Tobacco company meaning that is should be less sensitive to changes in market conditions than a toy company like Hasbro.

The Equity beta for the whole company and for the commercial division is calculated in the appendix.

Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%.

1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can

A common practice to determine the firm’s beta is to draw from historical data from published sources or compare numbers to competitors. In this case, Heinz can compare to Kraft, Campbell Soup and Del Monte and use professional judgement in determining the stock’s sensitivity to the market. A stock’s beta can be determined using a formula as well.

In the healthcare industry both Johnson & Johnson and Eli Lilly Company has a beta of less than 1%. This means both companies stock remain constant on the market, regardless of the markets up and down swings. In looking at Johnson $ Johnson with a beta of .67 this means the company stock is 33% less volatile (risky) as others in that market. Therefore, as the market prices goes up and down, it is expected that Johnson & Johnson will be underperform by 33% when the market is up and outperform by 35% when the market is down. Both companies have a lower risk but that also means sometimes less return. Consumers can go with cars and even cable but it difficult for individuals to go without healthcare. Healthcare (products and services) are considered inelastic, which makes it hard for consumers to stop buying what is needed or find adequate substitutes. In comparing

From this information we knew that we were looking for a company that has a small beta looking for something below 0.3. Through our research we were able to find that American Water Works has had a share price performance of only 1.65% over the last twelve months. In our early research we found on Folio Investmenting that the utilities sector has the lowest beta compared to the other eight man industries. From this information we decided to focus on utility companies with small betas and then we can

Beta measurement for the Nike Company, is a statistical measure that compares the volatility of a stock against the volatility of the broader market, which is typically measured by a reference market index. Since the market is the benchmark, the market's beta is always 1. When a stock has a beta greater than 1, it means the stock is expected to increase by more than the market in up markets and decrease more than the market in down markets. Conversely, a stock with a beta lower than 1 is expected to rise less than the market when the market is moving up , but fall less than the market when the market is moving down. Despite being rare, a stock may have a negative beta, which means the stock moves opposite the general market trend (Macro Axis, 2017).

Throughout the semester we really had to watch the markets in order to obtain a successful portfolio. The way we approached this task was through constant watching of the securities market to find out current trends as well as picking up stocks we thought were undervalued at that time. The latter, of course, applies to our managed portfolio, where we were able to select stocks we deemed were good investments. We observed that this specific portfolio gave us more stable returns, which we attributed to the lower betas of these stocks. One can also conclude that the worst performers of the same portfolio were due the same cause. Based on the returns of our managed portfolio, one can conclude that we chose to

For this variable we take again the same risk free rate (4.66%) plus the equity market risk premium (5%) multiplied by the equity Beta of the E & P division (1.40). The beta we calculate with the comparables. The average equity beta in this industry is 1.15 and the average D/E ratio is 39.8%. With these information and the same formula as in question 3 we compute the asset beta

Since the company is newly listed in stock market, no sufficient historical data for the calculation of beta, so we selected the comparable companies Charles Schwab Corp (Discount Brokerage), Quick & Reilly Group (Discount Brokerage) and Waterhouse Investor Srvcs (Discount Brokerage). Because the operating business scope and the brokerage revenue percentage to total revenue for these companies are similar to the Ameritrade, we just use these companies’ historical data for the calculation of Ameritrade’s beta. *Note: Although E*Trade (Discount Brokerage) has the similar business scope with the Ameritrade, we excluded this company since the company strategy is not to be a discount brokerage.

2. Question: Explain the rationale behind using beta as a measure of risk. Compute the company’s beta based on the divisional betas and compare it with that provided by Value Line and Merrill Lynch. Explain some of the inconsistencies that can be found in reported betas. Do historical betas provide good measures of the future riskiness of firms (or divisions)?

The estimated beta of firm is about 1.27. This figure is retrieved from a reliable website-www.finance.yahoo.com.

Beta is used in the capital asset pricing model (CAPM) which is a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market and beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. Stock A has a beta of 1.315, so theoretically stock A is 31.5% more volatile than the market. Stock B has a beta of -.557 which means the stocks are a commodity.