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Hi John
Please explain part c of this question (regarding the calculation) where it states we need to explain the impact of the acquisition on the required rate of return of equity investors in polar finance
Thanks
The shareholders required rate of return is determined by the equity beta.
Because the level of gearing is changing we need to use the asset beta formula to determine the asset beta, and then again to regear with the new gearing to determine the new equity beta.
Also, because we are combining two streams with different risks (i.e. different betas), we need to use the fact that the total beta when combining two streams is the weighted average of the two different betas.It really would help you to watch the free lectures on CAPM.
(Can I ask you what resource you used for your studying before you started attempting past questions?)
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