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Question

Use the following information to answer the question(s) below.
Consider the following information regarding corporate bonds:
Rating AAA AA A BBB BB B CCC
Average Default Rate 0.0% 0.1% 0.2% 0.45% 2.2% 5.5% 12.2%
Recession Default Rate 0.0% 1.0% 3.0% 3.0% 8.0% 16.0% 48.0%
Average Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31

Company Market Capitalization ($mm) Total Enterprise Value ($mm) Equity Beta Debt Rating
Taggart Transcontinental $4,500 8,000 1.1 BBB
Rearden Metal $3,800 7,200 1.3 AAA
Wyatt Oil $2,400 3,800 0.9 A
Nielson Motors $1,500 4,400 1.75 BB

Your estimate of the asset beta for Nielson Motors is closest to:
A) 0.59
B) 0.66
C) 0.71
D) 1.75

Answer

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