In this session, I argue that betas don’t come from services or regressions but from choices companies make. Specifically, the beta of a company will reflect:
1. How discretionary the products or services that the company offers are, to its customers: Companies that offer more discretionary products/services will have higher betas.
2. Fixed Costs Tilt in Cost Structure: The greater the proportion of costs that are fixed costs, the higher the beta will be.
3. Financial Leverage: Borrowing increases the risk of the equity in the business, and with it the beta.
I closed the session by noting a property that betas have, i.e., that they are weighted averages and used the Disney & Cap Cities merger to illustrate.
Post Class Test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session8test.pdf
Post Class Test Solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session8soln.pdf