COEDEN CO (DEC 12 ADAPTED)

1. Hi John, you told me that earnings retention rate (in part a) is the amount retained divided by the earnings. However, why do we use risk free rate of return to get the earnings retention rate ? i don’t get the reason behind it…. is it like an assumption of using rfr for the earning retention rate ?

2. (after implementing the proposal), the question have stated that non current liabilities are reduced by 70% if the current debt credit rating is improved to A+ ( which it did) so shouldn’t this affect the gearing to some extent ? therefore, this shows that we can’t use 50% & 50% for the gearing ratio of getting asset beta, hotel services.

I know there are no other figures other than 50% and 50% for the Ve and Vd to get the asset beta(hotel services) however, doesn’t 70% affect this Ve and Vd isn’t ???