Coeden Co – Dec12 (part a)

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September 25, 2019 at 12:49 am #547282
barryhastings
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Hi,

Im struggling to work through some parts of this question unfortunately.

I totally understand how we derive the Asset Beta of 0.61 but Im totally confused with how we get the Asset Beta of Hotel Services only of 0.75? Maybe I am being totally thick but I just cant grasp it?

I am hoping the Godfather of Accounting (Mr Moffat) can help me here?

Thanks in advance
September 25, 2019 at 7:03 am #547304
John Moffat
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If two streams with different betas are combined together, then the overall beta will be the weighted average of the individual betas, as I explain in my free lectures on CAPM.

Here we know that the overall asset beta for Coeden is 0.61, and at the moment Coeden is 60% hotel services and 40% property business.
The question also tells us the the asset beta for property business is 0.4.

Therefore, if X is the beta for hotel services:

0.61 = (60% x X) + (40% x 0.4)
0.61 = (60% x X) + 0.16
60% x X = 0.61 – 0.16 = 0.45

X = 0.45 / 0.6 = 0.75
September 25, 2019 at 11:11 pm #547398
barryhastings
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Thank you sir, the penny has dropped I think (well I hope)!!
September 26, 2019 at 9:01 am #547419
John Moffat
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You are welcome 🙂
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