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Fabuki Co Q2 Dec10

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  • This topic has 5 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • November 25, 2015 at 8:08 pm #285291
    sami12185
    Member
    • Topics: 24
    • Replies: 39
    • ☆☆

    How to calculate Ke by using asset beta method and capm because in examiner ans diffrnt method is used

    November 26, 2015 at 8:48 am #285373
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    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.

    November 26, 2015 at 10:16 pm #285597
    sami12185
    Member
    • Topics: 24
    • Replies: 39
    • ☆☆

    Thanks alot u rocks #johnMoffat 😀

    November 27, 2015 at 7:41 am #285638
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    You are welcome 🙂

    December 9, 2015 at 3:45 pm #289660
    sami12185
    Member
    • Topics: 24
    • Replies: 39
    • ☆☆

    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?????

    December 9, 2015 at 4:44 pm #289744
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    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 = $37.95M

    Use 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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