This problem tests your understanding of the chapter appendix. Dome Appliance, Inc., a private firm that manufactures home appliances, has hired you to estimate the company’s beta. You have obtained the following equity betas for publicly traded firms that also manufacture home appliances.
|
| ($ millions) | |
Firm | Beta | Debt | Market Value of Equity |
Black&Decker | 1.19 | $4,100 | $6,300 |
Fedders Corp. | 1.20 | 5 | 200 |
Helen of Troy Corp. | 2.14 | 380 | 530 |
Salton, Inc. | 3.25 | 375 | 115 |
Whirlpool | 1.83 | 10,600 | 9,100 |
a. Estimate an asset beta for Dome Appliance.
b. What concerns, if any, would you have about using the betas of these firms to estimate Dome Appliance’s asset beta?
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