You seem to relever your beta using existing debt to cap even in cases its obvious such a ratio is unsustainable. Do you believe you should change the capital structure to current industry levels (if the company has cash flows to get there) and then relever the beta?
You asked a very good question. We actually relever beta using the industry debt to equity ratio and industry beta. Using BP stock research report as an example, the original debt to equity ratio is 27.1% while the original beta is 0.72. We use the industry debt to equity ratio of 29.3% to compute the relevered beta of 0.77 for our WACC calculation. Sometimes the numbers happen to come out the same as the original figures, but this is a fluke rather than a consistent method we use.
A follow up question is we don't make any assumptions of cash flow viability when we compute the industry D/E or beta. In nearly every case, we use the industry averages to compute a stocks specific weighted average cost of capital. For any research report, we encourage our visitors to use the experimental mode, where they can change numbers, formulas and assumptions to suit your own purposes.
If you have any other questions, please respond back. We hope this helped. Thank you, Dave
This is a very good website to analyze stocks but I have a question regarding the beta you guys use. You guys relever the beta with industry debt to equity ratio. Wouldn't it makes more sense to apply the merryln adjusted beta, the 2/3(Regression Beta) +1/3(1).
Also wouldn't it make more sense to unlever the beta asset with the average cash ratio as well because cash is riskless. There is no risk at all for cash and cash is certain.
Your suggestions are very interesting. I don't see a problem incorporating those changes into our analysis, but can you provide more sources to help us to understand the affect of those changes?
I have my assumption about the cash beta issue, but I'd rather understand the suggestion better, before making a change to the analysis.