BBS STORE JUNE/06 (BUSINESS RESTRUCTURING)

The best approach is as follows: We know the current equity beta of the whole company (1.824) and so we can work out the asset beta for the whole company using the asset beta formula. (We know the current market values of the equity and the debt using a combination of the nominal values on the balance sheet and the market values per share etc..) We also know the equity beta for property - there is a 'representative portfolio' with an equity beta of 1.25. We can calculate an asset beta for property using the asset beta formula, and the gearing of the 'representative portfolio'. Because the total asset beta of BBS is a combination of property and retail, it means that this total asset beta will be the weighted average of the asset betas of property and of retail, weighting by the market values. The question tells us the value of the property part - the retails part is the balance. So....since we know the total asset beta, the asset beta of property, and the weighting, we can work backwards to get an asset beta for retail. I hope that helps! If not, ask again :-)

thanks so much for helping...........100% understood your answer, thanks again

You are welcome :-)

Hello! I would like to ask also about that question. Why the 6800 equity is split by 4338 for property and 2462 for retail ? What is the weighting ?

If you look at the table in the middle of the question, then it tells you what the value is of the property (and to the balance is the value of the retail).

Hi John, could you tell me why market gearing = D/(D+E) rather than D/E? I thought gearing can be both?

Sir I couldn't understand how the Beta .625 is arrived at in finding out the beta for retail store.In the question it is mentioned that the property business has a ‘representative portfolio’ with an equity beta of 1.25. Very very confused. Rest of the part is fine. Thanks in advance. Jaison Philip

The gearing ratio can indeed be both, but we are looking at the gearing for the formula to ungear the beta.

The overall beta of the business is the weighted average of the betas of the two parts - property and retail - weighted by the market values of the two parts. Since we know the overall beta of the business, and we know the beta of property, we can work backwards to calculate the beta of retail.

If you watch the free lectures on CAPM you will find that I go through the procedure of weighting betas to calculate an overall beta (and working backwards as is needed in this question).

Sorry, but I still cannot understand how I can calculate the beta of property section (0.625). Can you please help me?

You get it by ungearing the equity beta of the "representative portfolio" of other property companies. They have an equity beta of 1.25. You are told the gearing is 50% (after tax), and so you can calculate the asset beta for property by using the asset beta formula.

So do you mean that beta for property section is 1.25 * 50/(50+50)=0.625? Thanks a lot!

Yes :-)

Thanks for confirmation! I wanted to be 100% sure that this is how it's done.

You are welcome :-)

Hi sir, I couldn't see the word "retail" in the whole question. but it appears in the answer. this is the question in June 2009 right? I am finding the weighting between "retail" and property and I read your answer above, that u are saying it appear in the table in the middle of the question, but I don't see any. can you show me the sample of your question paper?

Although I cannot upload any of the question paper (it is copyright of the ACCA, and they get very upset about that sort of thing :-) ), I am sure that I am looking at the same question as you. You are quite correct in saying that there is no mention of retail in the question (the examiner only used the word in his answer) although in some ways it doesn't matter what the 50% that is left is. The clue, however, is that the company is called BBS Stores, which does suggest that they are stores selling things (i.e. retail), but that they also own property. It was rather unfair and is one of the factors that made it a very difficult question (and is also one of the reasons that the examiner who set that exam did not last very long - many of his questions were awful, and he only lasted a few year. The new examiner took over in 2010.

Agree :), I am currently on struggle to digest his questions (before dec 2010 PYQ). I have finished all the current examiner's question, only left few questions prepare by the previous examiner, which are now making me having serious headache. The problem is that, i can't find the information about the weighting between this two business activity of BBS. Mind telling me you manage to find it from which number?

The property is the land & buildings, and the assets under construction. They are all realistic values (since the land & buildings have been revalued). The retail is the balance remaining. I do hope that helps :-)

It helps, thanks a lot sir!!

Great :-)

can I ask something regarding other question in this thread?

Ask as many questions as you want, but please start a new thread if it is about a different question. It is so that other people can get the benefit as well.

Dear Mr Moffat, I have a question in relation to the beta asset. In this question, I am happy with the method of finding betas as instructed from the question's information and from your further explanations. However, in the real life, would it be the case that the beta asset of the retail business sector is higher than the one in property as I think it is riskier when investing in property line? Thanks alot. Hanhvn

Oooh - we could argue about that for ever, and there is no real answer. All I would say is that in the long-term property does tend to be a fairly safe investment (in the short term, certainly property prices can fluctuate a lot, but in the long term they tend to increase). Retail however does tend to be more volatile (certainly in the UK) with changes in peoples buying habits and with new competition appearing. The large supermarkets in the UK are a good example at the moment, with all the long-established names suffering falls in profits currently due partly to consumers having less money, and partly due to new, cheaper, supermarket chains appearing.

Great! I am enlightened! Getting know about this, in particular with your real examples, seems excellent. Thank you very much.

You are very welcome :-)

Dear Mr Moffat, J have a question to part a of the question. Why adjusted earnigs for 20X8 figure doesn't affect Retained Earnigs Figure in SOFP? Thank you very much.

It is only Option 2 that will affect the earnings and the retained earnings under Option 2 have been adjusted.