Answer to Question #146908 in Accounting for artemisia

Question

8. Avoplant is in the agriculture industry. It basically plants and sells avocado. The company owns a huge piece of land in South Lebanon at an elevation of around 400m above sea level which makes it perfect place for avocado. Avoplant is all equity financed. The company is planning to go public and investors are estimating its cost of equity. You are asked about the beta of the company. Which, in your opinion, is your best guess about the company’s beta:
a. Beta of Avoplant is low because people will eat no matter of what the economic situation is.
b. Beta is low because of their business model perfect location for avocado and no debt.
c. Beta is high because the demand for avocado is sensitive to economic conditions
d. Beta is high because there is a high chance of having a bad crop this year
e. Beta cannot be determined because we do not have a reliable market index for Lebanon
Why:____________________________________________________________________

Answer 1

Answer: b

Beta is a measure of systematic risk or volatility in the firm's stock returns. Business cycle, level of financial leverage and capital structure influence beta index. A business with a lower financial leverage or debt level is less susceptible to systematic risk. Thus, Avoplant is expected to have a lower beta, that is, lower risk due to its 100% equity capital structure and favourable physical position for the business