AFMDec 2013 ques 3 a

It would help if you said which bit of the calculation is causing you a problem. If it is calculating the asset beta, then when two streams with different betas are combined then the overall beta is the weighted average of the individual betas. (If it is this bit that is causing the problem, then the free lectures on CAPM will help you)

Thanks. I was confused with the asset and equity beta was calculated. And calculation of total PV of cash flows years 5 to perpetuity. I got different numbers than in the solution.

Which different numbers? The cash flows themselves, or was it the discounting that was the problem?

I was also confused how is the PV of years 5 to perpetuity calculated

You can get the discount factor in 2 ways (both give the same answer, subject to rounding which is irrelevant). Method 1: Calculate the discount factor for 1 to infinity (which is 1/r) Subtract the annuity factor for 1 to 4. That leaves you with the factor for 5 to infinity. Method 2: Calculate the discount factor for 1 to infinity (which is 1/r). However, because is starts 4 years later (time 5 instead of time 1), you then multiply by the ordinary 4 year discount factor. Again, both answers will be the same apart from rounding.