Hi Tutor ,
A company is deciding how new investments should be appraised - either NPV or APV or MIRR
Investment will be financed 50% equity and 50% Debt and expected company gearing after investment will be Equity 60% and debt 40% to Market value .
Investment equity beta is given as 1.5
No data has been given regarding market values of debt or equity
======================================
Now we can calculated asset beta using asset beta formula so that the value can be used for APV calculations:
Asset beta = 1.5 * Ve / Ve + Vd ( 1-t )
In the solution they have shown the following :
Asset beta = Equity Beta * E / ( E+ D ( 1-t ))
Used E= 1 and D = 1 and arrived at an answer = 0.882
Could you please explain why they used E = 1 and D =1 ?
Many thanks in advance,
Regards,
RMR
Ask the Tutor ACCA AFM
BPP- Mock 2 - Q3 Tampern Co
12y ago#1It is because it is to be financed 50%/50%.
You could have used 50 and 50 instead of 1 and 1 - you would get the same answer.
Sign into reply to this topic.