If a company does not have a longer historical data how do we compute the 5yr beta?

Question

should we use another company's historical data? How do we pick the right company? should we combine the data of both or just use the other company's data?

Answer 1

If you can find other firms in the same business line, you can use their betas. However, you need to be careful about capital structure. You need to unlever the betas of the other companies, take a weighted average (by market value -- equity plus debt) & then relever that using the debt level of your company.

This works well if you really have comparable companies. But what if your company has several different divisions? If you can get a beta for each division & know the size of each division -- then the company beta will be a weighted average of the divisions betas.

This is all discussed in Brealey & Myers text on Corporate Finance -- which is used at all the top B-Schools.

This material is usually glossed over in introductory finance classes, and covered in more detail in case based advanced corporate finance classes.

Answer 2

I would look for similar firms with longer histories and compute a weighted average of their betas (using their market cap for weighting).

Answer 3

You don't.