The equity beta can then be calculated using the current financial leverage for Disney as a firm. Combining the market value of equity of $ 55,101 million an estimated market value of debt of $14,668 million39, we arrive at the current beta for Disney:

Equity Beta for Disney = 1.0674 (1+(1-.373)(14, 668/55,101) = 1.2456 This contrasts with the beta of 1.01 that we obtained from the regression, and is, in our view, a much truer reflection of the risk in Disney.

In Practice: Can't find comparable firms?

A problem faced by analysts using the bottom up approach for some firms is a paucity of comparable firms, either because the firm is unique in terms of the product it offers or because the bulk of the firms in the sector are private businesses. Rather than fall back on the regression approach, which is likely to yield a very wide range for the beta, we would suggest the following to expand the comparable firm sample:

• Geographic expansion: When analyzing firms from smaller markets, such as Brazil or Greece, the number of comparable firms will be small if we restrict ourselves only to firms in the market. One way to increase sample size is to consider firms in the same business that are listed and traded in other markets - European markets for Greece and Latin American markets for Brazil. With commodity companies that trade in global markets, like paper and oil companies, we can consider a global sample.

• Production Chain: Another way to expand the sample is to look for firms that either provide supplies to the firm that you are analyzing or firms that feed off your firm. For instance, when analyzing book retailers, we can consider book publishers as part of the sample since the fortunes of the two are entwined. It is unlikely that one of these groups can have a good year without the other partaking in the success

39 The details of this calculation will be explored later in this chapter.

• Customer specialization: Using the same rationale, the betas of firms that derive the bulk of their revenues from a sector may be best estimated using firms in the sector. Thus, the beta of a law firm that derives all of its revenues from investment banks may be best estimated by looking at the betas of investment banks.

Illustration 4.6: Bottom-up Beta for Bookscape Books

We cannot estimate a regression beta for Bookscape Books, the private firm, since it does not have a history of past prices. We can, however, estimate the beta for Bookscape Books, using the bottom up approach. Since we were able to find only three publicly traded book retailers in the United States, we expanded the sample to include book publishers. We list the betas of these firms as well as debt, cash and equity values in Table 4.9:

Table 4.9: Betas and Leverage of Publicly Traded Book Retailers and Publishers







Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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