Hello

I understand that we are ungearing the capial structure of company Y to understand risk factor of investing by purely acquiring shares in Y. But in part b we are not changing the captital structure of company Y are we? Company X is just investing by acquiring 50% shares and 50% debt in company Y. This does not modify the capital structure of company Y to 50 50, does it? Tha should depend on how much Comp X is investing in Comp y in proportion to COmpany Ys current capital structure.

Could you please clarify why we are using the Asset beta of comnpany Y with a structure of 20:100 and apply the same asset beta for a modified structure of 50:50 to calculate equity beta?

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John Moffat says
October 22, 2024 at 4:04 pm
X is not investing in company Y at all. However the gearing used to appraise the new project is the gearing used in the project, not the current gearing of the company.
The asset beta is measuring the risk due to the type of business i.e. ignoring any gearing. So the asset beta of the new project will be the same as the asset beta of Y because they are both involved in shipbuilding.
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rouquinblanc says
October 22, 2024 at 10:18 am
Hello
I understand that we are ungearing the capial structure of company Y to understand risk factor of investing by purely acquiring shares in Y. But in part b we are not changing the captital structure of company Y are we? Company X is just investing by acquiring 50% shares and 50% debt in company Y. This does not modify the capital structure of company Y to 50 50, does it? Tha should depend on how much Comp X is investing in Comp y in proportion to COmpany Ys current capital structure.
Could you please clarify why we are using the Asset beta of comnpany Y with a structure of 20:100 and apply the same asset beta for a modified structure of 50:50 to calculate equity beta?
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