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i am confused about asset beta and equity beta calculation..
i saw lecture and the steps i followed was to un geared asset beta of webb co which gave me answer of 1.28 (80/100*1.6) assume that tax rate is only for combined entity only as mentioned in question.
then i calculated equity beta which turned out to be 450/500*Be=1.28
Be=1.42and then Ke =.03+1.42(.058-.03)=.811
then WACC calculated = 450/500*.811+50/500*.05*.7=.7335
so cash flow of combined will be discounted at this rate or im totally wrong in my concept and i need to follow kaplan…
free cash flow of webb co
10m/.7335=13.63Hi, dont have time to truly try to understand your question. But judging from the answer using CAPM you may have put in the numbers incorrectly in the calculator. 81% should not be returned from that. Answer should be below 8% = 0.08
Even if it was correct, this is an extremely high cost and in practice i dont think it will be sustainable.
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