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Dear John,
I don’t understand why we need to use 0.68 as Anatra’s asset beta to calculate the combined asset beta (with Cigno). From my understanding, 0.68 is the asset beta of Anatra’s current business which includes medical R&D and equipment manufacturing.
So since Cigno is going to unbundle the equipment manufacturing business and absorb only the medical R&D business, shouldn’t we need to use the asset beta of Anatra’s medical R&D business instead of 0.68(which is the asset beta of both the medical R&D and equipment manufacturing business)?
You have a point, but firstly, there is not enough information given in the question to be able to calculate the asset beta just of the medical business.
Secondly, the question specifically writes how they want the WACC calculated under the heading “estimating the combined company’s weighted average cost of capital’.
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