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How to calculate Ke by using asset beta method and capm because in examiner ans diffrnt method is used
The current cost of equity is 14% and therefore using the ordinary CAPM formula ‘backwards’ gives an equity beta of (14 – 4.5) / 4 = 2.375
To get the asset beta, we use the asset beta formula, and the asset beta =
(50 / (50 + (50 x 0.75)) x 2.375 = 1.357
Therefore the ungeared cost of equity = 4.5 + 1.357 x 4 = 9.928%
The slight difference is purely due to rounding and one would use 10% anyway.
One thing more I need to now why u used 50% debt & 50% equity instead of using there mrkt value and in capm we can use beta of asset and equity depending on the situation?????
We are using the total market values of Haizum.
Equity is 15M shares x $2.53 = $37.95M
Debt is $40M x 94.88/100 = $37.95MUse these value is you want, but it is the same as 50:50
Because it is an APV question, the flows are calculated at the cost of equity as if it were all equity financed. If all equity financed then the equity beta will be the same as the asset beta.
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