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From my understanding Asset Beta means risks relating to the the industry/Sector where the Company operates and in getting the equity beta of the company , the asset beta has to be regeared.(i.e Ungear and regear Equity beta while asset beta is only Regeared). Working through the “Mercury Training ” question in June 2008 P4 paper, While I understand that Jupiter’s Beta of 1.5 should be ungeared to get the Asset beta relevant to the training industry (as it is done in the BPP answer),the same principle is not applied to the 0.9 beta which relates to the financial Sector which I think should be considered as Asset beta and should be multiplied with 1/3 (the financial sector ratio) directly. Why should the Asset beta of the Financial Sector be Ungeared and treated as if it is equity beta? Why cant the 0.9 taken as Asset beta of the industry, multiplied by the ratio of the Financial sector ,and the result added to the asset beta ratio of the training sector for Regearing of the Mercury beta?
The betas that are published in the papers are always the equity (geared) betas.
For that reason, in the exam you always assume that betas that are given are equity betas unless you are told otherwise.So, Jupiter’s beta is an equity (geared) beta and needs to be ungeared in order to get the asset beta – you are happy with that.
But similarly, the average beta for the financial sector is the average equity (geared) beta and therefore needs to be ungeared in order to get the asset beta for financial services. It is ungeared using the average gearing of the financial service sector.
(Even though you are wrong in saying that the asset beta of the financial services industry is 0.9 (because it is a geared beta and needs un-gearing) I do not understand why you then want to multiply it by the ratio of the financial sector. What we need is the two asset betas.)
Thank you very much Mr Moffat. Your first paragraph has illuminated my troubled mind. Actually I was thinking that the published data is asset beta due to my wrong impression that Sector/industry’s beta is always an asset beta.
But now the guiding principle is…”””’.The betas that are published in the papers are always the equity (geared) betas.
For that reason, in the exam you always assume that betas that are given are equity betas unless you are told otherwise….”””
Thanks once againDear John,
First of all i have same problem related to this question so i thought i should ask here….. Hope you dnt mind.
In Mercury training (a) part i was stuck i mean how they calculate average asset beta for Mercury. I searched and tried a lot but didnt find anything which clears the concept of calculating average of asset Betas
I didnt found your lecture in which you explian how to calculate weighted average of betas.Can you show me the link.
and please explain by calculating how they get average beta…. i.e. figures of 0.67 & 0.33.
I know there is something which i am missing….
Thanks in Advance
SyedCombing betas is explain in Chapter 10 of the lecture notes and the lectures that go with it.
The last line of the second paragraph of the question says that 1/3 (i.e. 0.33) is in financial service (and therefore 2/3 (or 0.67) is in training).
Hi John,
You said that 2/3 is in mercury training but in the answer it is 2/3*1.39. I didn’t understand this part.1.39 is the asset beta for training, and 0.75 is the asset beta for financial services.
Therefore, as I wrote before, the total asset beta is the weighted average of the two betas – (2/3 x 1.39) + (1/3 x 0.75)
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Hello John,
Pls how did they calculate the Value equity and debt in the question?You don’t actually need the market values themselves – only the ratios.
However, Jupiter has 50M shares with a market price of $5.80 per share, so the total market value = $290M.
The question says that the ratio of debt to total market value is 12%, so debt is 12% of the total and equity is 88% of the total.
So the market value of the debt is 12/88 x $290M = $39.6M
For some reason the examiners answer shows them at $29 and $3.96, but it makes no difference when they are used in the asset beta formula, because again it is only the ratio that matters.
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