Discussion Issues and Derivations
- Estimating bottom-up betas for projects
The bottom-up beta for a project can be estimated as follows.
1. Identify the business or businesses that make up the project.
2. Estimate the unlevered beta(s) for the business or businesses that the firm is involved in.
3. Calculate the leverage for the project. If the project is part of a larger firm, use the target debt/capital ratio ( in market value terms) for the firm. If the project is a stand alone project, use the debt/capital ratio for the project.
4. Estimate the levered beta for the project using the unlevered beta from step 2 and the leverage from step 3.