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#1
03-23-2017, 11:11 PM
 Hodgey8806 Member CAS SOA Join Date: Dec 2012 Posts: 61
I need help with a question.

I need to compute a new hurdle rate for my company.
Suppose my company competes with companies A, B, and C respectively with equity betas of .7, .8, .9 (while my company has an equity beta of .9). As well, suppose my company has an A- rating while these companies have an BBB+ bond rating.

Which components would I use for my hurdle rate? My debt to equity ratio is 1 to 4, while the average in the industry is 1 to 6.

Do I need to "unlever" the equity betas before utilizing them?
I was thinking I should take the industry average levered beta and the industry average bond rating in calculating my WACC (along with my debt to equity ratio).

Marginal tax rate is 40%.

Thanks!
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#2
03-27-2017, 12:16 PM
 MathGeek92 Member Join Date: Jul 2004 Posts: 732

If I understand correctly... You must be publicly traded otherwise you wouldn't know your Beta or your competitors (they must be public also).

The market sets the cost of capital rate, but you are free to use whatever you want. you have more debt than your peers, and the market is giving you a higher Beta because of it, that's because (likely) the market perceives your company to be more risky ( could be due to higher debt, or could be because of product profile - i.e. maybe you sell a ton of risky GMxB contracts).

Rating agencies are always, always behind the market...

The market sets your cost of capital at all forms in the cap structure.. you can of course ignore it and use "whatever" you want, but the market will "reward" or "punish" you based upon the markets desire for return for the risk your company is taking

 Tags cost of capital, finance, wacc, weighted average