Question

For the CAPM model, what beta should I choose for a beverage company:average beta for that industry, unlevered beta or unlevered beta corrected for cash? What is the difference between these 3 betas?
Thank you.

Answer 1

use unleverred beta corrected for cash and then lever it using the debt to equity ratio of your firm.
1.Average beta of the industry= beta levered and includes the debt to equity of the industry. your firm might have a different debt to equity ratio so you need to unlever this average beta
2. Unlevered beta includes cash: since you are discounting FCFF or FCFE to get PV of operations you are usinga discount rate that doesn't take cash into account since cash is considered a non-operating asset
3. Use beta unlevered adjusted for cash (i.e without the impact of cash) to get the PV pf FCFF or FCFE and then add to this PV the cash balance.

Answer 2

To add to Danielle's informative reply, here's how you can get from a leverred beta to an unleverred cash adjusted beta.

First, unlever the normal beta: Unlevered beta = Beta / (1 + (1-tax rate) D/E)

Second, correct for cash: Cash-adjusted beta = Unlevered beta / (1 – Cash/ Firm Value), where firm value is market value of equity + market value of debt