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Good day,
I am having trouble with the calculation of the Asset beta for hotel services in part @ of the question. The answer as per BPP Kit is 0.75.
Could you kindly explain to me how this figure was calculated?
Regards,
GaryBPP has the same answer as the examiner (because they copy his answer 🙂 )
When two types of business with different betas are combined together, then the overall beta is the weighted average of the individual betas of the two types of business (weighting by the values that are given in the question – 60% and 40%)
In this question, we know the overall beta and we know the beta for property companies, and so we can work backwards to arrive at the beta for hotel services.
It will help you to watch our free lectures on CAPM.
Can you kindly show me how the calculations are done to arrive at the beta for hotel services?
Thanks very much.
Have you watched the free lecture where I go through examples of weighting the betas?
60% is hotels and 40% is property (with beta of 0.4)
So the overall beta is (60% x hotel beta) + (40% x 0.4)
We know the overall beta is 0.61So…..(0.6 x hotel beta ) + 0.16 = 0.61
(0.6 x hotel beta) = 0.45
Hotel beta = 0.45/0.6 = 0.75
Dear Mr. John,
The principle of weighted average beta of sub-businesses is only applied for ASSET BETA ? NOT for EQUITY BETA ?
because equity beta taken into account capital structure, which we can not reasonably assume weighted average rule between sub-businesses apply here?
Well when you simplify it like that it begins to make sense..lol
Thank you!!
Regards,
GaryTrangtubin: the idea of taking a weighted average always applies. However you can only apply it to equity betas provided that the gearing remains the same (because – as you will be aware – equity betas are always higher than asset betas because of the gearing creating more risk.)
Sir, for the calculation of market value of debt
Is it the correct if present my answer as below?
For year 1-3 cash flow 5.2
For year 3 cash flow 100
The examiner use year 1-2 cash flow 5.2, year 3 cash flow 105.2
That is fine – the answer will be exactly the same and it doesn’t matter how you present it.
Thank you so much sir!
Wish me luck for my p4 exam this friday! ??
Is there any tips? ??
I do wish you the best of luck 🙂
With regard to tips, we don’t guess any longer but someone has posted the guesses of other tuition providers: https://opentuition.com/topic/acca-december-exam-tips/
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Hello,
Could i please clarify:
1) why equity beta is assumed to be same before and after implementation of the proposal
2) why cost of debt doesn’t take into account corporation taxThank you!
1. The equity beta is not assumed to stay the same. It is currently 1.1 and falls to 0.93 after implementation of the proposal.
2. The cost of debt does take tax into account. In the calculation of the WACC it is multiplied by 0.8 to take account of the tax of 20%. (When calculating the market value of the debt, tax is irrelevant because it is the investors who determine the market value and they are not affect by corporation tax.)
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