Estimation choices for Beta estimation

Three concerns are worthy to take in account when conduct Beta estimation:

First. length of the estimation period. Examples:

  • Value line and Standard &Poor’s: five years of data
  • Bloomberg: 2 years of data

Evaluation:

  • Pros: Longer estimation, more data
  • Cons: Longer estimation are not favorable when firms change risk characteristics over time period.

Second, return interval:

  • Annually
  • Weekly
  • Daily
  • Intraday basis

Evaluation:

  • Too frequent basis might cause bias in cases of non-trading.
  • Small firms with less liquidity might suffer from downward valuation if too frequent interval is used.

Third, the choice of market index. The beta estimated are generally made based on the market the stocks are traded.

 

Source: Investment Valuation, Tools and Techniques for Determining the Value of Any Asset, Aswath Damodaran, 2nd Edition

 

 

 

 

 

 

DCF: long-term growth rate calculation

Calculate long-term growth rate

Step 1: Calculate Return on capital

  • NOPAT
  • Debt+equity

Return on capital = NOPAT/ (Debt+equity)

N.B.:

  1. Calculate NOPAT
Revenue
-Cost of goods sold
=Gross profit
-Selling, general & administration
=EBITDA
-Estimated depreciation
=EBIT
EBIT
-Taxes @ 35%
=NOPAT
+Estimated depreciation
=Cash flow from operations

 

  1. Debt are long-term obligations (listed on Balance sheet)

 

Step 2: Calculate Reinvestment rate

  • Change in net fixed assets
  • +Change in net working capital
  • =Net investment
  • NOPAT

 Reinvestment rate=Net investment/NOPAT

 

Step 3: Calculate long-term growth rate

g=Return on capital*reinvestment rate

Calculate Beta based on imported stock price

3 approaches to calculate beta

Before going into the following three approaches, it is necessary to calculate the return rate based on stock prices:

Return rate=Stock price (t+1)/Stock price (t)-1

 

Approach 1: Beta= Covariance (ri,rm )/Variance of Market

The covariance of the return of an asset and the return of the benchmark divided by the variance of the return of the benchmark over a certain period.

1 

 

Approach 2: Beta= Correlation(ra,rm)* S.D(i)/ S.D(m)

2

Functions used in Excel:

“CORREL” =Correlation

“STDEV” =Standard deviation 

 

Approach 3: Slope function in Excel

SLOPE(known_y’s, known_x’s) 

Y-axis refers to Market Index, e.g. S&P 500

X-axis refers to targeted company, e.g. Amazon

 

BETA-CAPM1

Source: http://www.investopedia.com/ask/answers/070615/what-formula-calculating-beta.asp