BBS Stores – asset beta calculation

[clairemcfadden863]

I’m having difficulty in seeing how the asset beta of 0.625 is calculated. I can see that 50/50+50 x 1.25 gives this answer, however i do not understand why equity is not calculated as 100%? If market gearing is 50% I would take this as meaning debt over equity is 50/100 – giving the gearing as 50%. I thought this would have meant equity equalled 100, and so in the asset beta formula I calculated 100/100+50 x 1.25 to give an answer of 0.83333 for the asset beta. Can you please explain where i am going wrony? Many thanks

[John Moffat]

Gearing is more normally measured as debt/(equity plus debt), and this is the definition that the examiner has used. (Although he should actually have made this clear in the question. This was the previous examiner – the current examiner would make this clear.)

[acnam]

Hi,
I still don’t understand point b) ungearing and asset beta of current company, how do we come to 1.646?
I also have some difficulties with other areas of BSS Stories exam question.
Option 2, value off equity, (425 mio x 4 – 217,75 mio) x 4. I know that market value of this share is 4, but why do we need multiply 4 two times? Is the first 4 something else?

What about asset beta adjusted, value of retail sector 5569 and 4705 in both options. How do we come to this numbers?

[John Moffat]

Arriving at the asset beta of 1.646 has been done using the normal asset beta formula that is given in the exam (and that I explain in detail in my free lectures).

The first multiplying by 4 is because they are 25c shares and therefore the number of shares in issue is 4 times the total nominal value.

The total value of the business is 6.800.
The value of the property (from the question) is (50% x 2297) + (50% x 165) = 1,231
The value of the refined is 6,800 – 1,231 = 5,569.

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