Hey guys,
For a public company when calculating cost of equity, do I take company's beta or do I take comparable companies median beta and then unlever it and re-lever it?
It does make sense for private companies to use comparable companies beta but I am not sure about a public company
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Based on the most helpful WSO content, here's what you need to know:
For a public company, you typically use the company's own beta when calculating the cost of equity. However, if you believe the company's beta is not reliable or representative (perhaps due to insufficient trading history or other anomalies), you might consider using the median beta of comparable companies. Here’s a detailed approach:
Using the Company's Own Beta:
Using Comparable Companies' Beta:
This method ensures that the beta used in your cost of equity calculation is adjusted for the specific capital structure of your company, providing a more accurate reflection of its risk profile.
For private companies, this approach is essential since they do not have their own market beta. For public companies, it can be a useful cross-check or alternative if the company's own beta is deemed unreliable.
Remember, the asset beta (unlevered beta) represents the risk of the asset without the additional risk of leverage, and re-levering it adjusts for the specific capital structure of the company in question.
Sources: DCF Modeling Course ~ Pre-training text.pdf, Notes for Technical Interview Questions, Notes for Technical Interview Questions, https://www.wallstreetoasis.com/forum/investment-banking/which-de-ratio-should-i-use-on-a-3-year-projection-of-the-following?customgpt=1, Investment Banking Interview Questions - 15 Answers to Land the Job
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