WACC : Historical Beta Values

[rohit.bhat]

Could someone please enlighten me as to what databases exist for historical beta values (say past 5 yrs.)for companies?Which databases are considered most reliable?

Also we use peers to find an average unlevered beta value and then lever it to the capital structure of the target company. Is there a database that does these calculations to arrive at beta values?

Thanks
Rohit

[wsthost]

Q1) Bloomberg should be able to handle that easily. Go to Ticker <EQUITY> Beta and you can customize date range and periodicity. Most other financial database vendors should also be able to handle.

Q2) it's really not that hard. Our online course, Advanced Financial Modeling - Enhancements to the Core Model and/or Complex Trading Comps course provides the template. You would need to use existing capital structure to lever and unlever and decide if any preferreds are tax deductible or not. As such, we don't recommend automating everything. This is why you get paid the big bucks!

[rohit.bhat]

Q1> When I am picking competitors to calculate average of beta values, what are the evaluation criteria one should keep in mind while picking competitors? Which ones to pick and which ones to not pick?

Q2> Why don't we include the target company itself in calculating the average beta value?

[rohit.bhat]

Fernandez from IESE business school in 2007 in a paper mentioned some formulae for levering/unlevering beta

Fernández (2006):
• If the debt is expected to be proportional to the book value of equity, the correct relationship
between the levered beta (ßL) and the unlevered beta (ßu) is: ßL = ßu + (ßu – ßd) D (1 – T) / E.
See Fernández (2004a).
• If the debt is expected to be proportional to the market value of equity, the correct
relationship between the levered beta (ßL) and the unlevered beta (ßu) is: ßL = ßu + (ßu – ßd)
(D / E) [1 – T Kd / (1+Kd)] . See Miles-Ezzell (1980),
• If the company will not increase its debt, the correct relationship between the levered beta
(ßL) and the unlevered beta (ßu) is: ßL = ßu + (ßu – ßd) (D – VTS) / E. See Myers (1974):

Other wrong relationships are:
Damodaran (1994): ßL = ßu + ßu D (1 – T) / E
Practitioners: ßL= ßu + ßu D / E
Harris-Pringle (1985), Ruback (1995 and 2002): ßL = ßu + (ßu – ßd) D / E

Are the relationships mentioned by Fernandez used? What is ßd? What is the rationale behind them?

Thanks
Rohit

[wsthost]

The accepted and widely used definition on Wall Street is:
ßL = ßu * [1 + (D/E) * (1 – T) ]

Which works out algebraically to the same as the one you listed for Damodaran.

In short, this means that the ßL is higher than ßu by a factor equal to D/E ratio (tax-effected) since debt introduces more volatility into earnings.

Rohit, this concept is fundamental to Corporate Finance and we have covered it extensively in our Finance 101 course and Corporate Valuation/Corporate Finance course. Please go here for more information:

Finance 101: http://www.wstselfstudy.com/package1-1.html
Corporate Valuation: http://www.wstselfstudy.com/package2-1.html

and just for asking smart questions, we'll give you 10% off: use discount code elearning

[wsthost]

your prior post:
Q1: this is the part of the process of picking comparable companies; use the same criteria as those you think are closest to you
Q2: it's like mean reversion: in statistics, never mix historical and projections when doing regression, the actual number will distort your results.

This is covered extensively in our Private Company Valuation class:
http://www.wstselfstudy.com/privateval.html

and again, use discount code elearning for 10% off

[rohit.bhat]

For cost of debt calculations the most widely used practice is to use the credit ratings to assign a credit premium over a risk free rate. which sources are used to get the values of premiums based on the credit ratings?

Is there any subjective analysis involved?

[wsthost]

The defacto source is from Bloomberg and spreading current credit yields over treasuries to obtain premiums.
Use function FOMC (Fair Open Market Curve) and select the desired ratings. The desired ratings is based on the approximate leverage statistics of your company being analyzed. The only subjectivity involved is trying to guestimate the rating, but that should spit out of your model.

[rohit.bhat]

I came across two approaches to use the risk free rate for calculating cost of debt and cost of equity:
1> Use the US Treasury Yield and add Country Risk Premium based on Country Credit Ratings
2> Use the yield of the Local Government's Bond

If we use the approach 1, one gets wrong values for countries like Japan. Their Sovereign Bond Yields are lower than US. And the cost of debt in Japan tends to be typically 2-3%. Using approach one, the risk free rate itself is more than 3.5 and then based on the company's credit rating more premium would be added. So where is the anomaly in approach 1.

And for approach 2, is it correct? Do we need to use the yield in local currency or yield of debt issued in foreign currency? And where can one find Sovereign Bond Yields for countries like India, China, Lat-Am, and other countries in emerging markets?

[wsthost]

We apologize for having to give a weak response this time - however, this specific issue is addressed in our Private Company Valuation course...
http://www.wstselfstudy.com/privateval.html

it would take too long to re-hash the entire course...