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Dear John,
To this question, I would be grateful to be clarified the below points
+ To EVA fomular, the WACC should be calculated based on the book value of Equity and
Debts, why in the anwser, the Market value is used+ In order to calculate the Combined Asset Betas, with item should be weighted with individual company’s assets betas is appropriate, in the answer the CF is used, pls. advise
Much thanks
WACC is best calculated using market values. However EVA is being removed from the P4 syllabus and so I would not really worry about it.
With regard to combining the asset betas, there is no strict rule and it depends what information is available in the question.
What we are after is what proportions of the business have the different risks/betas. In this question you are told that the proportions of cash flows will be 20% / 80%, and since it is the cash flows that carry the risk, then this is the most sensible weighting to use.In other questions you do not have that information and therefore more commonly we use the amounts invested (the market values).
As always in P4, the important thing is always to state your assumptions (in question 1, there is rarely just one ‘correct’ answer, which is why you are always expected to list assumptions you have made within the report. If you have done the correct workings based on the assumptions you have made (and the marker can follow your workings because they are neat!) then you get the marks.
Great !!
So we do not need to study any EVA question in P4 now, is it right, John?
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