Calculating Beta From Comparable Public Companies

Assume we want to estimate the beta of an illustrative Ahsan energy services company
with a target debt-to-equity ratio of 0.5, and the following companies are the most
comparable companies when tax rate is 32%.

Beta Beta
Comparable Companies, as of year-end 2014 Debt(Million) Equity(Million)
Levered Unlevered
Halliburton Company (HAL) 1.6 7,840 16,267

Schlumberger Limited. (SLB) 1.65 10,565 37,850

Helix Energy Solutions Group Inc. (HLX) 1.71 523.23 1653.47

Superior Energy Services, Inc. (SPN) 1.69 1,627.84 4079.74

Ahsan energy services company (AES) 1.782

Find the Beta of Ahsan energy services.

Step1 : Comparable companies given
Step 2: Beta Unlevered
For Company HAL
1.6
Betaunlevered =
7840
1+ (1−0.32)
16267
1.6
Betaunlevered =
1+0.481(0.68)
1.6
Betaunlevered =
1.3271
Betaunlevered for HAL=1.2066

For Company SLB

1.65
Betaunlevered =
10565
1+ (1−0.32)
37850
1.6
Betaunlevered =
1+0.27(0.68)
1.6
Betaunlevered =
1 .1898

Betaunlevered for SLB =1.387

For Company HLX

1.71
Betaunlevered =
523.23
1+ (1−0.32)
1653.47
1.6
Betaunlevered =
1+0.316(0.68)
1.6
Betaunlevered =
1 .2160
Betaunlevered for HLX =1. 406
For Company SPN
1.6 9
Betaunlevered =
1627.84
1+ (1−0.32)
4079.74
1.6 9
Betaunlevered =
1+0.399(0.68)
1.6 9
Betaunlevered =
1 .271
Betaunlevered for SPN =1.32

Taking Average of All Beta Unlevered

Average = (1.2066+1.387+1.406+1.32)/4
= 5.345/4
Average Beta Unlevered = 1.33

Step # 4:
Betalevered of Ahsan .=1.33∗(1+ 0.5 ( 0.68 ))

Betalevered of Ahsan .=1.33∗(1 .34)

Betalevered of Ahsan .=1.782
 Cost of equity:
CAPM = Rf + B (Rm- Rf)

Now what is Beta β ?

β is Risk
Risk is Uncertainty it could be loss or it could
be profit
Un predictable
Unknown about anything or future outcome it
could be positive or it could be negative
Risk:
Bike One wheeling what is the risk associated
with this?
Accident or not meet with any accident
Cars: Race: Win or Loss
Along with Debt any Risk is associated?
Debt Interest is not able to pay

Systematic Risk: Risk which are prevailing in the system

Corona:
Inflation:
Bomb Blast:
Economic instability:

Unsystematic Risk: Debt Ratio Increase risk increase

Beta β
Consists of 2 types of risk
1. Market Risk
2. Company individual risk like Debt

Beta β stock market listed

Warda wants to invest in a company, which is not listed on Stock
market? Invest higher return as compared by investing in any
listed company
Warda don’t know what is the Beta β of the unlisted
company? She doesn’t know what is the risk in this company?

Beta β:
Market Risk
Company Debt risk
Step#1 You have to find a similar company like wise in which
you want to invest which should be listed on stock market.
 Same Sector
 Same Manufacture/ Same Services

Coca Cola is listed on stock market Beta β (Levered) given

Pepsi is not listed

Beta β, which includes both type of risk market risk (Systematic) as

well as debt risk (unsystematic risk), is called Levered Beta.

Step#2 you have to Unlevered the Levered Beta.

You have to eliminate the Debt Risk from that Levered Beta.
After eliminating the Debt Risk remaining Beta is called Unlevered Beta
Unlevered Beta includes only Market Risk
All companies in one sector will have same Unlevered Beta.

β levered
β unlevered=
Debt
1+ (1−Tax )
Equity
B levered of the company listed on stock market
Debt and Equity should be of the company listed on stock
market while unlevered the Beta
Beta Unlevered is same for all companies.
Market Risk for that company which is not listed.
What we want is Beta Levered of that company which is not
listed on PSX.

Step# 3:
We will Levered the Unlevered Beta by using Debt and Equity
of the unlisted company.

Debt
β levered=β unlevered [1+ (1−Tax)]
Equity

When we are again Levered the Beta we will

use Debt and Equity of unlisted company
because we are going to find Beta Levered for
Unlisted company
How to Calculate the Beta of a Private
Company
Beta as an Indicator
A company’s beta is a measure of the volatility, or systematic risk, of a security, as it
compares to the broader market. The beta of a company measures how the
company’s equity market value changes with changes in the overall market. It is used in
the capital asset pricing model (CAPM) to estimate the return of an asset.

Beta, specifically, is the slope coefficient obtained through regression analysis of the
stock return against the market return. The following regression equation is employed to
estimate the beta of the company:

Such a regression analysis can be conducted for listed companies because historical

stock-return data is used. But what about private companies?

Due to the lack of market data on the stock prices of private companies, it is not possible
to estimate stock beta. Therefore, other methods are required to estimate their beta.

Calculating Beta From Comparable Public Companies

In this approach, we first need to find the average beta of the publicly-traded companies
that generate income from similar operations as the private company. This will be
a proxy for the industry average levered beta. Second, we need to unlever the average
beta using the average debt-to-equity ratio for these comparable companies. The final
step is to re-lever beta, using the private company’s target debt-to-equity ratio.

Assume we want to estimate the beta of an illustrative energy services company with a
target debt-to-equity ratio of 0.5, and the following companies are the most comparable
companies:
 β levered
β unlevered=
Debt
1+ (1−Tax )
Equity
When we get the beta unlevered then we can easily get the beta levered of the unregistered firm by
using this formula.

Debt
β levered=β unlevered [1+ (1−Tax)]
Equity
Comparable Companies, as of year-end 2014 Beta Debt Equity
Ahmed Cement 1.6 7,840 16,267

A new cement company name Wasiq Cements

introduces in the market, which is a good
investment opportunity. The company Debt value
is 6987 and equity Value is 17845. Find the Risk
associated with Wasiq Cement. While Tax rate is
32%. Suggest me that in which company I should
invest being considered me as pessimistic.

Step# 1: Already given

Step# 2:

Betalevered of listed co.

Betaunlevered =
Debt of listed company
1+ (1−Tax )
Equity of listed company
 1.6
Betaunlevered = 1.6
7840 Betaunlevered =
1+ (1−0.32) 1+0.481(0.68)
16267
1.6
Betaunlevered =
1.327
Betaunlevered =1.21

Beta Debt of unlisted company =Betalevered of unlisted co.

unlevered∗1 + (1−Tax)
Equity of unlisted company

6987
1.21∗1+ (1−0.32)=Betalevered of unlisted co .
17845
1.21∗1+ 0.39(0.68)=Betalevered of unlisted co .
1.21∗1.2652=Beta levered of unlisted co.

1.5308=Beta levered of unlisted co.