regression betas, we would suggest the latter
approach.- Averaging approach. The average beta across the
comparablefirmscanbeeitherasimpleaverageora
weightedaverage,withtheweightsbasedonmarket
capitalization. Statistically, the savings in standard
error are larger if a simple averaging process is used. - Adjustment for cash. Investments in cash and
marketable securities have betas close to zero.
Consequently,theunleveredbetathatweobtainfora
business by looking at comparable firms may be
affected by the cash holdings of these firms. To
obtain an unlevered beta cleansed of cash:
- To calculate the unlevered beta for the firm, take a
weightedaverageoftheunleveredbetasofthebusinessesit
operatesin,usingtheproportionoffirmvaluederivedfrom
eachbusinessastheweights.Thesebusinessvalueswillhave
tobeestimatedsincedivisionsofafirmusuallydonothave
market values available.
33 Ifthesevaluescannotbeestimated,wecanuseoperating
income or revenues as weights. This weighted average is
called the bottom-up unlevered beta.
34
4.Calculatethecurrentdebt-to-equityratioforthefirm,using
marketvaluesifavailable.Ifnot,usethetargetdebttoequity
specifiedbythemanagementofthefirmorindustry-typical
debt ratios.