BBS Stores (6/09) & Romage (6/00)

[kimtranvn]

Dear Sir,

I need your advice on question BBS Stores (6/09) & question Romage (6/00):

BBS STORES (6/09):

1) In part (b) solution: asset beta = 1.824 x (1 – 0.09748).
I understand 0.09748 = 1,130(1-35%)/(6,800+1,130(1-35%)).
The question is why the debt in this case is 1,130 only. Why dont we in clude other non-financial liabilities (890) ?

2) In part (b) solution: 1.646 = 4,338 x asset beta/6,800 + 2,462 x 0.625/6,800.
In this calculation 6,800 is market value of equity value so this is the weighted average
of equity value. In study text book (BPP) this should be the weighted average of total company value cluding equity and debt (refer to study text page 325 & 326). So why are the calculations different?

3) In (2) above, asset beta is 0.625 which is not mention in question. I understand 0.625 = 1.25 x 50%/(50% + 50%) Please confirm if my undertanding is correct. In this case, why dont we show the working for 0.625?

ROMAGE (6/00)

In part (b) appendix 1, MV equity = 50/0.25 x 0.55 x 2.96. How can we get 0.55 in this calculation?

Thanks,
KT

[John Moffat]

1) Because they are non-financial. We only include non-current liabilities in the formula.

2) The examiner has used the equity values to get the weighted average of the betas on the basis that it is the equity that carries the business risk. There is an argument for using the total value – what is important (as always in P4) is to state your assumptions. There is rarely just one correct answer in P4 – it depends on assumptions.
I cannot comment on what BPP say in their Study Text because I don’t have it 🙂

3) You are correct in your understanding of the calculation of the 0.625. I don’t know why the answer does not show the workings for it – I would have done!!

Romage:

In (b) (i) of the question, you are told to use 55%in any gearing estimates.

[kimtranvn]

Thanks

[John Moffat]

You are welcome 🙂

[parisnaaa]

Hi John,
Regarding option 2, why are they taking the amount 1231 and deduct 360 to get 871? The amount 1231 is of option 1. Why is it related to the second option?

I thought the share repurchase calculation would be 425/4=106.25 shares. The share capital =106.25 *0.25=26.56.

[parisnaaa]

Hi John, one more thing, In a ii, to to calculate the retail asset beta why is 0.625 taken as property’s beta asset? How is it calculated?

[John Moffat]

The 1231 is the money from the unbundling and will happen under both options. The options only relate to what they do with the money.

The explanation of the 0.625 is given in the first post in this thread. It used the idea that the total beta is the weighted average of the individual betas, as is explained in my free lectures.

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