Question

QUESTION 4 Consider the following information regarding corporate bonds: Rating AAA AA A T IAA BBB BB CCC Average Default Rate 0.0% 0.0% 0.296 0,496 2.196 5.296 9.996 Recession Default Rate 0.096 1.09 3.0% 3.096 8.0% 16.096 43.096 Average Beta 0.05 0.05 0.05 0.10 0.17 0.26 10.31 Equity Debt Rating BBB Company Market Capitalisation Total Enterprise Value ($mm) ($mm) Taggart $4,500 8,000 Transcontinental Rearden Metal $3,800 7.200 Wyatt Oil $2,400 3,800 Nielson Motors $1,500 4,400 Your estimate of the asset beta for Taggart Transcontinental is closest to: 0.66 0.42 0.59 0.71 1.3 AAA 10. 9A 1.75 BB

Answer 1

Beta of asset will be :

= Market value of equity/ total market capitalization * equity beta + market value of debt/ total market capitalization * debt beta

Since, debt of Taggart transcontinental is BBB , the average beta would be 0.1 from the table above,

So, the average beta is :

= $4,500/ $8,000 * 1.1 + $ ($8000 - $4,500) / $8,000 * 0.1

= 0.6188 + 0.0438

=0.6626

= 0.66

So, the correct option is option A.