Hi All,
I saw a question somewhere once where it required me to de-lever a company beta and lever it back up to using a given Debt/Enterprise Ratio(instead of Debt/Equity ratio). Could somebody please explain how this is done. I can’t find anywhere in the equity book how to do this?
Thank you
Look at reading 31 in the equity volume. There is a topic called “Beta Estimation” under the section “The Required Return on Equity.”
Thanks for your reply. Reading 31 provides an example using the D/E ratio. I want to know if the calculation is different when given the Debt/Enterprise Value ratio instead of D/E. Do we need to extract the D/E ratio somehow out of the given Debt/EV ratio?
Ummm, I don’t remember seeing a problem in the CFA material that utilized the EV in the denominator for beta calculation purposes. However, I can see how someone could interpret EV as the “total capital,” in which case you’d have the debt-to-capital ratio.
Extracting D/E then is super-easy. You already know the amount of debt in the capital structure! So if debt-to-capital is 0.2, you know debt is 20% while equity is 80%.
D/E = 0.2/0.8 = 0.25.
Again, I am assuming EV in this context is the same as total capital.
Thanks Aether,
Does anybody else have any other view?
Cheers
Agree with Aether, except that I would subtract Cash to calculate EV.
EV = D + E - Cash & Cash Equivalents!
trogulj, this is the reason why I said I don’t remember seeing any examples (either in volume 3 or 4) that involved calculating D/E from EV. Not because it is impossible, but because the conventional definition of EV also includes minority interest and market value of preferred stock (EV = D + E + Minority + P - Cash & Cash Eq.).
This example you’re referring to, is it in the CFA material? If not, then I’d be skeptical of whatever it is they were trying to convey.
Basically, you can get to (Total Capital = D + E) from EV, but they’d have to supply you with other terms. Hope this helps.