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In the Tisa Co(6/12) Exam question,
the examiner has found the Beta by only using the Equity value attributed to the relevant industry as the weightings. I read in an old post you posted that it is done so because only equity represent the asset beta risk.
But in a combined company valuation question in the Kaplan text book they have found the average beta of the combined company by using the pre acquisition company values as the weightings, which obviously contains equity and debt.
So does that mean Kaplan is wrong 🙂 , or do we need do this way only for the combined company question.
P.S: Why are the posts being locked after your reply? Would love to ask some follow up questions.
Thanks.
The examiner is a bit inconsistent on this, sometimes he answers in different ways (which does not matter because for Paper P4 there is never only one correct answer – it depends on assumptions, which is why you are always expected to state your assumptions).
However, usually it does make sense to do what Kaplan have done when it is a combined company question.
Posts are not always locked. Only when the specific question has been answered. It is because we cannot, and do not, give private tuition free of charge – we answer the specific questions asked.
Two days ago I’ve posted asking which debt to consider in a company valuation APV question. Whether to
1. take the debt the target company already has or2.to take the debt the acquiring company is about to raise to purchase the company,
for the financing effect section of the APV.
I’ve just read the BPP study text and they, just like Kaplan, have used the debt already in the company to appraise the tax shield.
What does this mean? which debt should we take in to consideration when calculating the tax shield? why arent we choosing the other one?
On the basis of what you typed previously, my previous answer was correct. They are already getting the tax benefit on the existing debt – it is therefore only any additional tax benefit that is relevant. Maybe the question had other relevant information which I am not aware of because I have not seen it.
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