Comments

  1. Profile photo of Michael says

    I’m having a problem playing this lecture, I’ve tried it on numerous devices (and in my dad’s!) for a few days now and it still stops after the intro.
    I’ve never had a problem playing any other lectures before or since.
    Is anybody else able to play it?

    • Profile photo of John Moffat says

      We don’t regear the company.

      When we know the asset beta for the project (by ungearing the equity beta of a company is the same sort of business), we then regear it for the project based on the gearing of the project. Unless we are told different we assume that the project will be financed in the same gearing ratio as the current gearing of the company.

  2. avatar says

    I would just like to say thanks a million for posting these lectures. You’re a brilliant lecturer and simplify topics so that the viewer understands how the formulae work, which enables one to reason things out rather than just memorise and hope for the best. Brilliant work and thank you for making our lives easier :)

  3. avatar says

    Hi Mr Moffat, i just have small question once again,,as you said , Beta is the level of risk of an investment relative to the market (stock exchange average), this focuses specifically on the systematic risk, assuming the shareholders hold diversified shares which eliminate or rather deal with the unsystematic risk by themselves,, my question is as u said the beta is partly affected by the level of gearing,, in which the gearing is unsystematic risk in which we have assumed to be eliminated,,so how come the beta have both an element of systematic and unsystematic risk?

    I sincerely appreciate for the awesome lectures and for the quick response you normally respond from the earlier questions,, thanks once again.

    • Profile photo of John Moffat says

      Gearing is not risk that can be measured in its own right. If profits before interest were certain (no risk) then the dividends would also be certain (no risk).

      What gearing does (because of the fixed interest) is make the existing risk (due to the profits being risky) greater.

      We are only interested in systematic risk (for the reasons you state above), but if there is gearing then this risk will be increased for shareholders because of the fixed interest, and therefore the equity beta will be higher.

      Gearing is not unsystematic risk – unsystematic risk is due to factors specific to the company (e.g. new management makes things more risky). Gearing makes this risk bigger as well, but we are not interested in unsystematic risk.

      (If my explanation of why gearing makes the existing risk bigger confuses you at all, then you will find a lecture here for F9 explaining how gearing makes the risk bigger, with a few simple numbers)

  4. avatar says

    Hi John,

    I have a quick question on example 1 page 114. P plc gearing ratio 0.4
    We took the following:
    Equity 100
    Debt 40

    I’m just confused why we didn’t take:
    Equity 60
    Debt 40

  5. avatar says

    Hi John,

    I have a quick question on example 1 page 114. P plc gearing ratio 0.4
    We took the following:
    Equity 100
    Debt 40

    I’m just confused why we didn’t take:
    Equity 60
    Debt 40

    Sorry if I’ve missed something obvious but if you could clarify for me.
    Thanks in advance
    Lydia

  6. avatar says

    Simply made simple. I just wonder why we must do the Asset beta calculations when we can tell just by looking at the two beta of shares which have been given that P plc has a higher beta thus more risky.

    • Profile photo of John Moffat says

      The share with the higher beta is certainly the more risky share.

      However, shares are risky for two reasons – partly because of the riskiness of the business and partly because of the way the business is financed (the level of gearing).

      The equity beta measures the riskiness of the share, but the asset beta takes out the effect of the gearing and measures the riskiness of the actual business. The question in the lecture asks for two things – which share is the more risky, and secondly which is the more risky business. The only way you can answer the second question it to remove the gearing effect by calculating the asset beta, and then comparing the two. Since the level of gearing in the two companies is different, there is no way of finding out which is the more risky business without calculating the asset beta.

      • avatar says

        Thanks, i think i did not realize how different the two questions are. so simple how we fail exams!!!
        Then i get the conclusion that a company would have more risky shares yet lessor risky business activity right? just that coincidentally P plc happens to be the more risky share as well as having the more risky business activity.

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