Dear all,
I have a question regarding a practice question in section equity valuation
Harriet Hilliard Case Scenario
Western Investment Analytics specializes in the valuation of thinly traded equities. Harriet Hilliard, one of Western’s analysts, is currently working to establish the value of Hattie’s Apparel, a small textile and clothing wholesaler headquartered in the southern United States. Hattie’s Apparel is a publicly traded company; in a typical week, however, fewer than 1,000 shares trade. Triway Textiles, Inc. is a NASDAQ-listed company that very closely resembles Hattie’s Apparel’s business activities but is far more actively traded.
Exhibit 1 provides summary financial and economic data relating to Hattie’s Apparel and Triway Textiles, along with Hilliard’s estimates of the responsiveness (i.e., the betas) of the companies to the Fama–French model (FFM) factors—equity risk premium factor (RMRF), market capitalization factor (SMB), and book-to-market factor (HML). Exhibit 1 includes a published estimate of the capital asset pricing model (CAPM) equity beta for Triway. Hattie’s Apparel does not have a published estimate of its CAPM equity beta because few analysts follow the stock, so Hilliard computes it, noting the difference in leverage between Triway Textiles and Hattie’s Apparel.
Using the information reported in Exhibit 1 and the leverage adjustment Hilliard uses, the equity beta for Hattie’s Apparel is closest to:
- 0.84.
- 0.71.
- 0.79.
Answer from CFA
C is correct. First, calculate the unleveraged beta of the benchmark (Triway Textiles):
Then calculate the equity beta for Hattie’s Apparel:
My question : they do not consider marginal tax rate when caculating β. In my opinion it should be:
Could some one explain it?