BBS STORE JUNE/06 (BUSINESS RESTRUCTURING)

The best approach is as follows:

We know the current equity beta of the whole company (1.824) and so we can work out the asset beta for the whole company using the asset beta formula. (We know the current market values of the equity and the debt using a combination of the nominal values on the balance sheet and the market values per share etc..)

We also know the equity beta for property – there is a ‘representative portfolio’ with an equity beta of 1.25. We can calculate an asset beta for property using the asset beta formula, and the gearing of the ‘representative portfolio’.

Because the total asset beta of BBS is a combination of property and retail, it means that this total asset beta will be the weighted average of the asset betas of property and of retail, weighting by the market values. The question tells us the value of the property part – the retails part is the balance.

So….since we know the total asset beta, the asset beta of property, and the weighting, we can work backwards to get an asset beta for retail.

I hope that helps! If not, ask again 🙂

You are welcome 🙂

If you look at the table in the middle of the question, then it tells you what the value is of the property (and to the balance is the value of the retail).

Sir I couldn’t understand how the Beta .625 is arrived at in finding out the beta for retail store.In the question it is mentioned that the property business has a ‘representative portfolio’ with an equity beta of 1.25.

Very very confused. Rest of the part is fine.

Thanks in advance.

Jaison Philip

The overall beta of the business is the weighted average of the betas of the two parts – property and retail – weighted by the market values of the two parts.

Since we know the overall beta of the business, and we know the beta of property, we can work backwards to calculate the beta of retail.

If you watch the free lectures on CAPM you will find that I go through the procedure of weighting betas to calculate an overall beta (and working backwards as is needed in this question).

You get it by ungearing the equity beta of the “representative portfolio” of other property companies. They have an equity beta of 1.25. You are told the gearing is 50% (after tax), and so you can calculate the asset beta for property by using the asset beta formula.

Yes 🙂

You are welcome 🙂

Although I cannot upload any of the question paper (it is copyright of the ACCA, and they get very upset about that sort of thing 🙂 ), I am sure that I am looking at the same question as you.

You are quite correct in saying that there is no mention of retail in the question (the examiner only used the word in his answer) although in some ways it doesn’t matter what the 50% that is left is. The clue, however, is that the company is called BBS Stores, which does suggest that they are stores selling things (i.e. retail), but that they also own property.

It was rather unfair and is one of the factors that made it a very difficult question (and is also one of the reasons that the examiner who set that exam did not last very long – many of his questions were awful, and he only lasted a few year. The new examiner took over in 2010.

The property is the land & buildings, and the assets under construction. They are all realistic values (since the land & buildings have been revalued).

The retail is the balance remaining.

I do hope that helps 🙂

Great 🙂