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Hi,
Could you please tell me how the standard deviation is calculated in the question? For instance on page 191 we have:
Equity market value 5775,4 and beta 0.98. How do you get ?S=?m*? of 7.84%
same with debt and then total:
total market value 8684,3 , beta 0.6936, how do you get ?S=?m*? of 5.5488%Appreciate your help.
I figured out the ?S=?m*?, there was 8% market risk in the question, i didn´t notice it before.
I have however other question: when we calculate the geared value of Elfix company, why do we only add the interest part of debt market value (139.643m) to the DT part of the equation V = U+ DT ? why we don´t use the total market value of debt of 218.603 – to have V = 514.972 + 218.603 * 0.3 ?
Many thanks!
i also cant understand why the answer show stabdard deviation of shares for Elfix. how they get 8.272. i know the are unlisted therefore might be more risk but how they get the figure?
For your question on why only interest part is added to DT is because payment of interest is tax deductible but not payment of principle.
this is the case for redeemable debt. For the case of irredeemable debt the PV of cashflow to infinity amounted to using the whole figure cos no principle is paid as it will not be redeemed
thanks a lot skybei1987.
regading your question: maybe it´s BPP error. The “should be” answer i take it as beta * market risk.The beta of a share measures its risk relative to that of the market.
So….if beta is 0.98 it means the risk is 98% of the risk of the market (which is 8% here).The figure of equity in Effix should be then 0.9784 * 8% = 7.8272 % , right?
So, BPP´s 8.272% is an error?Yes – BPP have made a mistake. The risk of the equity in Elfix should be 7.8272%
(This also means that their total risk figure (5.8648%) is also wrong. They have calculated it by taking the weighted average of the equity and debt risks – weighting by market values. This is fine, but because the equity risk figure is wrong, so is their total risk. It should be 5.5946. You can get the same figure by multiplying 8% (market risk) by the total Beta of 0.6993.
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