- This topic has 5 replies, 2 voices, and was last updated 10 years ago by
.
- Posts
Dear Tutor
can you kindly assist me on how the proxy asset beta was calculated. I worked asset betas for both the finance sector and Jupiter but not understanding where the figures 0.67 and 0.33 have come from?
The last sentence of the second paragraph of the question tells you that 1/3 (or 0.33) of Mercury’s business is in financial services. So the other 2/3 (or 0.67) is in training.
So the overall beta for Mercury is the weighted average of the betas for Jupiter and finance sector.
I hope that solves your problem 🙂
Thank you. What is the formula for finding the proxy asset beta incase i get a different question with different information. Also i tried to calculate the Equity Beta for Mercury using 1.177 asset beta with the following data ve=70% since we are given that debt to total mrket value is 30% but my answer was very wrong please assist.
1.177=(70/70+30(0.4))be
There are two separate things here.
To get the proxy asset beta, you take the equity beta for a similar company and ungear it to get the asset beta, using the gearing of the similar company. That is the proxy asset beta.
Separately, if a company is made up of investments in different areas (with different betas), then the overall beta of the business is the weighted average of the betas of the different areas. I can’t really write that as a formula, but you multiply each of the betas by the proportion invested in each area and then add them up.
There are examples of this in my free lectures on CAPM.
With regard to your calculation of the equity beta, you have multiplied the debt by T instead of by (1-T). (T being the tax rate).
It should be 1.177 = (70 / (70 + 30×0.6) ) Be
That will give you the correct answer 🙂
- You must be logged in to reply to this topic.