BBS store 6/09

There are two problems with the current equity beta of 1.824. Firstly, since it measures the riskiness of the shares in BBS, it includes the effect of the gearing that currently exists. Since the gearing is going to change, we need to remove the effect of the gearing by calculating the asset beta (using the formula on the formula sheet). Secondly, since part of the business is being sold, we need to know the beta of the part that is left - the current beta is the weighted average of property and retail, but the property part is being sold (and the question asks for the WACC of the remaining business, so we need the beta for the remaining business). Finally, because the question specifically defines the property as being land and buildings, it does not include fixtures and fittings - so they are not being sold.

hi Sir 1.I don't get while calculating the adjusted asset beta for option 1 how is the value of retail section taken as $5,569? 2. how come the cost of debt is 6.2% in calculating WACC for option 2? Thank you

1 The total value of the equity is 6,800 of which 2462 (2297 + 165) related to property. The proposal is that 50% of the property will be sold which leaves property at 1261. 5569 is the balance of the 6800. 2 6.2% is not the cost of debt (the cost is 6.2% x (1-t). However 6.2% is LIBOR of 5.5% plus 70 basis points (0.7%)

Dear MR Moffat i would like to knw the separate values that r included in the portfolio of bbs....which one is retail business n which one is property buss? I dnt get to wt they r referring to as retail buss? Secondly they also say 50% of assets under construction r being sold.... is dat too included in the portfolio of bbs? If i get this....rest of the calculations r clear to me.

Property is the land and buildings (the question specifically says that in the second paragraph below the second table) plus the assets under construction ( the question says that they relate to new building ). Retail business is everything else (i.e. fixtures, fittings and equipment). And yes, assets under construction are part of the property portfolio.

Thank u :)

You are welcome :-)

Hi John, In BBS Stores, a (i) when calculating the second option, why is the value released to buy back share is 217.75 million shares? When the nominal value is $0.25, I thought that the no of shares would be 871/0.25=3484 shares and share capital would be 3484*4.

Hi John, In BBS Stores, a (i) when calculating the second option, why is the value released to buy back share is 217.75 million shares? When the nominal value is $0.25, I thought that the no of shares would be 871/0.25=3484 shares and share capital would be 3484*4. Regarding retained earnings in option 2, why is 817 deducted in SOFP?

If they repurchase the shares then they have to repurchase them at the current market value, which (from the question) is $4 per share. Therefore they will repurchase 871/4 = $217.75M shares which will have nominal value of 217.75 x $0.25 = 54.44. They are paying out 871 to repurchase the shares. Of this, 54.44 will reduce the share capital in the SOFP, and the remainder (817) will come out of retained earnings.