10.6 Suppose that Apex Health Services has four different projects. These projects are listed below, along with the amount of capital invested and estimated corporate and market betas:
Project Amount Invested Corporate Beta Market Beta
Walk-in clinic $ 500,000 1.5 1.1
MRI facility 2,000,000 1.2 1.5
Clinical lab. 1,500,000 0.9 0.8
X-ray lab. 1,000,000 0.5 1.0
a. Why do the corporate and market betas differ for the same project?
b. What is the overall corporate beta of Apex Health Services? Is the calculated beta consistent with corporate risk theory?
c. What is the overall market beta of Apex Health Services?
d. How does the riskiness of Apex's stock compare with the riskiness of an average stock?
e. Would stock investors require a rate of return on Apex that is greater than, less than, or the same as the return on an average-risk stock?
a. corporate betas shows the business risk of a project, but market betas shows the relationship between the return the project and market rate of return.
b. overall corporate ...
The solution first discuss the definition of corporate and market betas and then calculate both of them in a specific example of Apex Health Services. Also, the average risk of stock is further discussed using the value of market beta.