Betas, Relative Risk and First Steps on Cost of Debt

In this session, we started by reviewing the pitfalls of regression betas. They are backward-looking, noisy and subject to game playing. We went on to talk about bottom up betas, focusing on defining comparable firms and expanding the sample. I did make a big deal about bottom up betas, but may have still not convinced you or left you hazy about some of the details. If so, I thought it might be simpler to just send you a document that I put together on the top ten questions that you may have or get asked about bottom up betas. I think it covers pretty much all of the mechanics of the estimation process, but I am sure that I have missed a few things. We also initiated the discussion of the cost of debt, defining it to be the rate at which companies can borrow long term, today and in the next session, we will complete our discussion of cost of capital.