Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:
-Your estimate of the asset beta for Nielson Motors is closest to:
A)0.59.
B)0.66.
C)0.71.
D)1.75.

Question

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:  
-Your estimate of the asset beta for Nielson Motors is closest to:
A)0.59. 
B)0.66. 
C)0.71. 
D)1.75.

Quizplus · Accepted Answer

The asset beta for Nielson Motors can be estimated based on the bond spreads provided. Using the table, we can find that the average bond spread for BBB rated bonds is 1.25% and the average bond spread for A rated bonds is 0.90%. Taking the difference between the two spreads (1.25% - 0.90%) gives us a bond spread differential of 0.35%. We can then use the formula to estimate the asset beta: Asset beta = Market Risk Premium x Bond Spread Differential / Equity Risk Premium. Assuming a market risk premium of 5.5% and an equity risk premium of 6%, we can calculate the asset beta for Nielson Motors as: Asset beta = 5.5% x 0.35% / 6% = 0.32 / 6% = 0.71. Therefore, the closest estimate of the asset beta for Nielson Motors is 0.71, which is option C.

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