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Dear Tutor,
Is it possible that in this questions the gearing level is 4:1 and not 1:4 debt to equity?
TR Co has a gearing level of 1:3 debt : equity. TR is considering diversifying into a new market. B Co is already operating in the new market. B Co has an equity beta of 1.05 and a gearing level of 1:4 debt : equity. Both companies pay 30% corporation tax.
According to the answer beta is 0.89.
I don’t really understand what you are asking.
If the question days that the ratio of debt to equity is 1 to 4, then this is all that is relevant for the asset beta formal.
You need to use the formula to calculate the asset beta (with an equity beta of 1.05 and using the gearing of B) ) and then use the formula again to calculate the new equity beta (using the gearing of TR).
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