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Dear Professor John,
Let me start by extending my most profound gratitude by the illustrious work that you are doing for the rest of us. It truly makes a huge difference.
I do not understand the working regarding calculating Morada’s asset beta, after taking away 30 % of the repairs and maintenance business.The exact layout of the calculation is:
Asset beta of travel services = [0·94 – (0·65 x 30%)]/70% = 1·06
May you please talk me through this part of the question for my clarity and sanity.
Why is there a division by 70%?
Thank you, sir!
You will remember from my lectures on CAPM that when two streams with different betas are merged together, then the overall beta is the weighted average of the individual betas.
Here, the overall beta is 0.94, and the beta of repairs is 0.65.
Suppose the beta of travel is X.Then 70% X + (30% x 0.65) = 0.94
So…70% X = 0.94 – (30% x 0.65)
So X = (0.94 – (30% x 0.65)) / 70%
Thank you very much. I did notice a few of the answers to the questions do present the calculations a few steps ahead, in a similar fashion to this… Much appreciated, sir.
Hi, Sir. May I know why does it values the repairs and maintenance business as 30%? Is it because it states “the book value of non-current assets will be reduced by 30%?
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