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Sir, In question COEDEN CO (DEC 12 ADAPTED) of Kaplan exam kit i didn’t get how asset beta of hotel industry is calculated.
Coeden Co, asset beta estimate
1.1 × 0.5/(0.5 + 0.5 × 0.8) = 0.61
Asset beta, hotel services only
How this can be the asset beta of hotel services only as we are using the current equity beta Coeden Co?Secondly Help me understand this question as well.
Asset beta of hotel services only:
0.61 = Asset beta (hotel services) × 60% + 0.4 × 40% Asset beta (hotel services only)
approximately = 0.750.61 is the asset beta of Coeden, it is not the asset beta of hotel services only (that is the heading for the next bit for the workings).
As I explain with examples in my free lectures on CAPM, when two streams with different betas are combined, the the overall beta is the weighted average of the two individual betas.
Here, property is 40% of the company and has a beta of 0.4. Hotel services are 60% of the company and we need to find the beta.
Therefore 60% x (hotel beta) + 40% x 0.4 = 0.61
Solving this gives the hotel beta of 0.75.
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