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In BBS Stores part B WACC’s calculation is required. I did not get how beta asset is calculated for retail business. and how the values (i.e retail value=4338, property value=2462) in beta asset’s calculation were determined?
keyboard: thank you for all these posts, but this is the Ask the Tutor Forum and you are not the tutor.
I am sure that they understood about betas – they were asking about one specific problem and your last post was not correct!
Please restrict yourself to answering in the general P4 forum.
angel / syedazmat:
We know the equity beta of BBS, and its gearing, and so we can calculate the asset beta of BBS using the asset beta formula.
However, because it is made up of two parts – property and retail – the overall asset beta is a combination of the two.
The total asset beta is the weighted average of the two individual betas, weighted by the amount invested in each.I assume that you are happy with arriving at the asset beta for property companies (using the ‘representative portfolio of property companies’).
So to get the asset beta of retail, we need to work backwards using what I wrote in the sentence before last.
The total invested in property is 2297 (land and building on the second page of the question) plus 165 (assets under contraction – it says below that the related to new building). This gives a total of 2462.
Since the total value of the equity is 6800 (and it is the equity that bears the risk), the balance of the 6800 is the amount invested in retail (6800 – 2462 = 4338).
So…..total asset beta = (2297/6800 x property asset beta) + (4338/6800 x retail asset beta)
We know total asset beta and property asset beta, so we can use the above to calculate the retail asset beta.
Hope that makes sense 🙂
Hi Sir,
I have used the representative portfolio of property companies to find the asset beta, but my asset beta is 0.39 not 0.625, can you please explain how to find the asset beta for property companies?
Vd = 0.5/ (1-0.35) = 0.77
beta asset = 1.25 (0.23/ 0.23+0.77*0.65) = 0.39
May I know which part I have done incorrectly?
Thanks very much!
Vd = 0.5, and Ve = 0.5
I don’t know why you have said that Vd = 0.5/(1-0.35) ????
Vd and Ve are the market values of debt and of equity. We don’t need the actual market values – all we need to know if that for every 50 debt there is 50 equity.
Hi Sir,
Why don’t we need to find the market value of equity?
How would I know if the examiner is not trying to test our understanding in calculating the correct market value of equity?I am assuming that the market value of equity will be “1-Vd (before adjusted for tax)”, given the market gearing (adjusted for tax) is 50%, how can the equity be 50%?
If i am assuming that way, it means all my answers will be incorrect.I realise that the asset beta for property is by multiplying 1.25 with 0.5 = 0.625, so 0.5 represents [Vd (1-T)/ Ve + Vd (1-T)] but instead of multiplying it with debt beta, we are using equity beta.
Am I making it too complicated by trying to find the market value of equity? 🙁
Please advise
If you know the market values of equity and debt then you would use them.
However here, there is no way of calculating the market values of representative property companies.But it does not matter, we know that the gearing is 50% equity and 50% debt.
The formula for getting the asset beta effectively uses a ratio, so it does not matter if Ve is 50M and Vd is 50M; or Ve is 200M and Vd is 200M – all that matters is that in this question the two are the same. (If you are not convinced use different values in the formula and provided you use equal amounts then you will always end up with the same answer)When the question says ‘average market gearing (adjusted for tax)’, that is the gearing – you do not need to adjust it again in any way.
Dear sir ,
I did not get the calculation part for asset beta:1.646 . What is the figure 0.09748 and also the reason why we do the part Vd (1-T)/Ve+Vd (1-T) .I have to Thank you sir because your lectures and the forums have helped me so much to clear all my acca papers!Im currently stuck with p4 though. This is my second attempt. Need your wishes.
I don’t know whose answer you are looking at – I am looking at the answer in the BPP Revision Kit. Maybe I am missing something but I cannot find the figure 0.09748 anywhere in the answer!!
With regard to the other calculation you refer to – it is the asset beta formula. We know the equity beta (1.646) and we need to use the formula to get the asset beta.
Thank you for your comments and I do wish you all the best for your second attempt.
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