Aswath Damodaran 150
Estimating Aracruz’s Bottom Up Beta
Comparables No Avg " D/E "Unlev Cash/Val "Correct
Emerging Markets 111 0. 6895 38. 33 % 0. 5469 6. 58 % 0. 5855
US 34 0. 7927 83. 57 % 0. 5137 2. 09 % 0. 5246
Global 288 0. 6333 38. 88 % 0. 5024 6. 54 % 0. 5375
! Aracruz has a cash balance which was 7. 07 % of the market value :
Unlevered Beta for Aracruz = ( 0. 9293 ) ( 0. 585 ) + ( 0. 0707 ) ( 0 ) = 0. 5440
! Using Aracruz’s gross D/E ratio of 44. 59 % & a tax rate of 34 %:
Levered Beta for Aracruz = 0. 5440 ( 1 + ( 1 -. 34 ) (. 4459 )) = 0. 7040
! The levered beta for just the paper business can also be computed:
Levered Beta for paper business = 0. 585 ( 1 + ( 1 -. 34 ) (. 4459 ))) = 0. 7576
The tax rates used were 32% for emerging market companies, 35% for U.S.
companies and 33% for Global companies, based upon averaging the marginal
tax rates in each group.
This is a solution to the problems associated with estimating betas for emerging
markets. Use bottom-up betas and lever up.
Note that
Firms which carry disproportionate amounts of cash (greater than is
typical for the sector) should have lower betas.
If they hold marketable securities (or stocks) the beta of these securities
can be used in computing the weighted average.
