Kristin Kandy is a small privately owned
candy-manufacturing business. To estimate its beta, we
looked at publicly traded food processing companies with
market capitalization less than $250 million. The average
regression beta across these stocks was 0.98, the average
debt-to-equityratioforthesefirmswas43%(30%debt;70%
equity),andweusedanaveragemarginaltaxrateof40%to
estimate an unlevered beta of 0.78:
The average R-squared across all the food processing
company regressions was 11.12%.
ThetotalunleveredbetaforKristinKandycanbecomputed
as follows:
Roughly,one-thirdoftheriskinthesefirmsismarketrisk,
andwearescalingupthebetatoreflectthetwo-thirdsthatis
firm-specific risk.
Incomputingtheleveredbeta,weassumethatKristinKandy
wouldfund its operationsusingthe samemixofdebtand
equityasthepubliclytradedfirmsinthesector—30%debt
and70%equity.Theleveredbetaandtotalbetaarecomputed
here(usingamarginaltaxrateof40%),with theresulting
costsofequityfromeach(witharisk-freerateof4.50%anda
risk premium of 4%).