Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:
-Trucks R' Us has a market capitalization of $142 billion,$78 billion in BB rated debt,and $10 billion in cash.If Trucks R' Us' equity beta is 1.68,then their underlying asset beta is closest to:
A)1.00
B)1.20
C)1.32
D)1.48

Question

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds: 
-Trucks R' Us has a market capitalization of $142 billion,$78 billion in BB rated debt,and $10 billion in cash.If Trucks R' Us' equity beta is 1.68,then their underlying asset beta is closest to:
A)1.00 
B)1.20 
C)1.32 
D)1.48

Quizplus · Accepted Answer

B)We can think of Trucks R' Us business assets as a portfolio of equity,plus debt,and less cash.Assuming the beta of cash investments is zero: β_U = 11ea7cce_3d14_eca3_928c_15a9798fa651_TB1626_11 β_E + 11ea7cce_3d15_13b4_928c_b9ee7ff1708e_TB1626_11 β_D+ 11ea7cce_3d15_13b5_928c_8531ebe0981e_TB1626_11 β_C = 11ea7cce_3d15_13b6_928c_691d6f68e2f1_TB1626_11 × 1.68 + 11ea7cce_3d15_3ac7_928c_4b14673607a8_TB1626_11 × 0.17 - 11ea7cce_3d15_3ac8_928c_899a8035ad76_TB1626_11 × 0.0 = 1.199 Alternatively,we estimate asset beta based on its net debt of 78-10=68 m.Using net debt: β_U = 11ea7cce_3d15_3ac9_928c_ab30223164a4_TB1626_11 β_E + 11ea7cce_3d15_61da_928c_f5b9cf571999_TB1626_11 β_D = 11ea7cce_3d15_61db_928c_8f972b4317c5_TB1626_11 × 1.15 + 11ea7cce_3d15_61dc_928c_97485f2a872b_TB1626_11 × 0.17 = 1.191 Note that both answers are quite similar.The second approach presumes that TRU's cash reduces the average market risk of its debt (as thought TRU used its cash to repay its senior debt).

Use the Following Information to Answer the Question(s)below