- This topic has 3 replies, 2 voices, and was last updated 10 years ago by
.
-
Posts
-
Hi,
As you know, we have the formula that:Assets beta =( equity beta x equity )/ (equity + debt)
=> Equity beta = asset beta x (equity + debt)/ equity
(ignore tax)
In the answer for question 1 of December 2014 (P4), when calculate the assets beta of Reka Co’s and Equity beta of Fugae Co, the examiner used value of debt multiple with 0.8 (asset beta of the non-luxury transport industry) instead of using debt value only.
Evenly, when calculate Project’s risk adjusted cost of capital, the examiner also use debt*0.8 instead of debt value only.
<Appendix 2.1>
Can you explain to me why the examiner did that (multiple debt value with asset beta of the non-luxury transport industry <0.8> in the above calculation?
Thanks a lot in advance,
HVI think you need to look again at the formula on the formula sheet, because it is not as you have written it!
asset beta = (equity / (equity + debt (1-T)) x equity beta.
If the tax rate is 20% or 0.2, then (1-T) = 0.8
OMG!!! I’m so sorry for asking this, i’ve completely missed the information abt tax rate 20%.
Thank you very much, John 🙂
- You must be logged in to reply to this topic.