bbs stores june 09

[jigsaw1992]

hi sir,

bbs stores june 2009,

part b:: to estimate the wacc for the remaining business under both options on the assumption that the share price remains unchanged,

this is my problem,,
i can understand that the retail company will unbundle and sell some assets to a new property company and thus the asset beta of the company of 1.646 will constitute the business risks of the two type of businesses retail and property.

but how did the examiner get the market values of each respective business so as to get the asset beta of the retail business separately ,because the question didnt even explicitly say that there is a retail and property business and thus these are their values. it just kind of sign posted that there will be two business types.
im seeing a value of 4338 for retail and 2462 for property, how did he get these??

please help me john

[John Moffat]

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 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.

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).

[jigsaw1992]

where does the 2462 market value of property come from

[John Moffat]

There is a table showing the net book value of assets. 2462 is the total of land & buildings and assets under construction. The line below makes it clear that they are market values (because revalued recently).

[ameera98]

Hi sir.
I cant understand why while calculating impact on eps in part a for 1 st option are we adding 70 basis points plus Libor for the 2 yr loan. Given that the credit spread reduced by 30 basis points, according to me, we must add back (5.5%+0.3%) to reverse the interest.

[John Moffat]

The 0.3% has been dealt with.

If you study the workings, then they save interest by repaying some of the existing loans at the rate currently being paid (5,5% + 0.7%). In addition they save interest at 0.3% on the 6 year debt because of the reduction in the credit spread.

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