- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Q: Four companies are identical in all respect, except for their capital structures, which follows:
…………………………………………………………….A..B..C..D
Equity as a proportion of total market capitalization 70 20 65 40
Debt as a proportion of total market capitalization 30 80 35 60The equity beta of A plc is 0.89 and the equity beta of D plc is 1.22.
Within which ranges will the equity betas of B plc and C plc lie?
Answer: The beta of B plc is above 1.22 and the beta of C plc is in the range 0.89 to 1.22
In Answer sheet.
The companies identical except for their gearing and the beta factor of equity shares
will increase with the gearing level. The beta of B plc( gearing 80%) is therefore higher than the beta for D plc (gearing 60%), example, over1.22. The beta of C plc (gearing 35%) is higher than the beta for A plc (gearing 30%) and below the beta for D plc. It must therefore be in the range 0.89 to 1.22.In my opinion.
the one i can’t understand is that they don’t consider Equity for gearing as calculating gearing and comparing with one another. Is this because they are in the identical criteria in all respects?
For instance, X invest money in Y plc. in this case, Beta Asset will be figured out based on Y and this one is used for getting Beta equity for Xplc.
that’s why in this question, they don’t consider equity proportion?
I always appreciate every comment from you. !
The asset betas of all four companies must be the same because they are identical except for the gearing.
The higher the gearing (i.e. the more the proportion of debt relative to equity) then the higher will be the equity betas. (The higher the proportion of debt then the higher the gearing, and automatically there will be a lower proportion of equity)
- You must be logged in to reply to this topic.