- 42 -
7-percent risk-free rate, a risk premium of 7.3 percent, and a
beta of "about 1.0, approximately equal to the overall market
average of 1.0".
Mr. Fuller calculated beta using the average unlevered
beta18 for the 23 publicly traded Midwestern banks tracked by the
Value Line Investment Survey (4th ed. Apr. 9, 1993) (the VL
list). The VL list included the leading full-service commercial
banks in the Midwest, such as Banc One Corp., First Chicago
Corp., National City Corp., and Norwest Corp. The VL list did
not contain any small, single-location banks such as Peoples; all
the banks on the VL list were substantially larger. The market
capitalizations of the banks on the VL list ranged from
approximately $700 million to $15 billion, with mean and median
capitalizations of approximately $3.76 billion and $2.88 billion,
respectively.
After calculating unlevered betas for each of the companies,
Mr. Fuller calculated an average unlevered beta of 0.9 and an
average relevered beta of 1. Despite the fact that Peoples was
unleveraged, Mr. Fuller chose a beta of 1, the same as the
average relevered beta.
18 An unlevered beta measures the business risk of a company
by removing the effect of financial leverage. This permits
the betas of comparison companies to be considered so that
business risk can be isolated and evaluated apart from the
risks associated with financial leverage. Copeland et al.,
Valuation: Measuring and Managing the Values of Companies
331 (2d ed. 1994).
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