Unlevered Beta

Finance allah shmoop What is beta it's Volatility That's it

here's a stock chart reflecting the performance of a highly

volatile stock plus size manikins ink and here's A teen

t stock chart The last twenty years Yeah Whole lot

less volatile Eighteen t stock has left beta then p

s m so here's p s m mapped over the

s and p five hundred Gopi sm is about twice

a cz volatile Is the market here like on days

The markets up one percent p s m is up

two percent on days The markets down four percent p

s m is crushed down eight percent So you'd say

it has a beta relative to the s and p

five hundred of two point Oh or two acts So

the hammer this home let's do advanced math here So

if any given day the marks up one point two

percent has bit of two point Oh you'd expect p

s m to be up two point four percent and

same deal on the downside Yeah All right So what

gives a company high beta Well simply put uncertainty Some

companies have products in the pipeline Where the broader market

has a lack of certainty that buyers by the millions

anyway will want that product sort of the opposite of

coca cola Like what are the odds that buyers will

still want diet coke next year Yeah pretty good odds

but plastic manikins modeling extra large kimonos away Less certainty

So the company may end up awesome and ruling the

world Or it may end up being melted down for

spare parts Yeah Making newsman drone helicopter thing right Well

what else creates beta Well leverage or debt Some companies

have tons of cash Others have tons of debt of

company a is trading for one hundred bucks a share

and it has no debt and ninety five dollars a

share in cash Will The market is valuing the operations

of that company and only five bucks a share So

the operations could do awesome Or they could do terrible

and nobody's going to care Big web stock goes to

one hundred hundred five Ninety five Something like that big

No big deal So yeah i think about that The

value The operations could increase one hundred percent and be

worth five dollars more than the company's worth one hundred

Five bucks No big deal All right but what about

company b It has one hundred million box in ibadan

or cash flow or cash earnings and five hundred million

dollars in debt Well it trade today at eight times

ebitda calculated as eight times that hundred million figure Then

subtracting the five hundred million dollars in debt Well the

company would be valued at three hundred million dollars That

would be its market cap But what if it's new

product is likely to be loved and people get excited

about it and its operation suddenly get valued at twelve

times even thought instead of just eight While the math

goes like twelve times than one hundred million in cash

flow for one point two billion then you subtract the

five hundred million dollars in debt And that gets you

a market value for the whole company of seven hundred

million dollars So think about it The multiple of even

da being paid by investors went up just fifty percent

from eight to twelve But the stock market value of

this company went up well over one hundred per cent

In fact one hundred thirty three percent Why so much

More volatile or so much more beta Yeah leveraged debt

gasoline on the fire It can be great but when

things go the other way it can leave you feeling 00:03:10.49 --> [endTime] you know like a dummy