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Dear Sir,
With the same assumption that the asset beta of combined company is weighted average of individual companies’ asset beta, weighted in proportion of the individual companies’ market value but there is a difference:
– Q1 Jun 2011: weighted by firm value (detb+equity)
– Q3 Dec 2013: weighted by equity value
Although these cases have enough information for calculating in both ways.
This is my misunderstanding anywhere or not?
Please help to explain.
Thank you, sir.
NhoYou are correct – it has been done in different ways and it is confusing!
Best is to weight by equity (because equity carries the risk) but I am sure the examiner would give the marks for either way.
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