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BETA in terms of Overall Risk of your Company

Using This Web Page, find the value of beta for your reference company. Write a two page paper discussing the following items:

a. What does this beta mean in terms of the overall risk of your company as the shareholders perceive it? What are the implications for raising equity capital for your firm based on this beta?
b. If you were going to select one or two companies to merge with based on beta, what would they be? Pick two companies, and explain whether you would choose to merge with high beta or low beta companies.

Explain your answers thoroughly using your knowledge of the concept of beta.
My company is Southwest Airlines, they trade under the name LUV. Below is the BETA
Information required for part A.

Part B requires two companies also in the airline industry.

inSouthwest Airlines (LUV)
14.47
0.00 (0.00%)
OPEN:14.48 MARKET CAP:11,298,653,000 P/E:0.00
HIGH:14.5 52 WEEK HIGH:18.20 F P/E:
LOW:14.4 52 WEEK LOW:14.14 BETA:1.021
VOLUME:3,928,156 AVG. VOLUME:0 EPS:0.8
Insider trading data for LUVBrowse LUV SEC Edgar filings

Solution Preview

Using This Web Page, find the value of beta for your reference company. Write a two page paper discussing the following items:

a. What does this beta mean in terms of the overall risk of your company as the shareholders perceive it? What are the implications for raising equity capital for your firm based on this beta?
Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall market. In other words, it gives a sense of the stock's market risk compared to the greater market. The Beta factor measures how volatile a stock is when compared with an index. The higher the beta, the more volatile the stock is. (A negative beta means that the stock moves inversely to the market so when the index rises the stock goes down and vice versa).The measure of stocks, the beta, is used to predict the measure of risk in the market. A Beta of 1.0 or higher indicates the stock would have more risk than the market average. If the Beta score is under 1.0 then would be less risk than the market average.
A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market, and a beta less than 1 means it tends to be less volatile than the market. Essentially, beta expresses the fundamental trade-off between minimizing risk and maximizing return.
IMPLICATION ON South West Airlines

The Beta of South West is 1.021 which indicates similar risk as market. This is based on the above discussion. Yes beta have the implication on the issue of equity. Lower beta indicates lower systematic risk of the company which means that the company has lower volatility and can have higher credibility in ...

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