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Hi John.
May I ask your help?
I was studying an exam kit (Kaplan). In the answer’s workings I have come across the normal formulae being ‘inverted’, as follows*:
Project’s risk adjusted equity beta:
B x (Ve+Vd(1-T))/Ve= XX.X% -> (‘Ve alone’ is at the bottom instead of at the the top)Projects risk adjusted cost of capital
(xx.x% x Ve) + (y.y% x vD(1-T)) / (Ve + Vd) = ZZ.ZZ %*(the text has the relevant numbers, but i have put it here in its basic form)
why are these workings ‘upside down’?
The formula on the formula sheet provided in the exam is for calculating the asset beta when we know the equity beta.
If on the other hand we know the asset beta and we need the equity beta, then we need to use the formula ‘backwards’.
I do go through this, and the reasons for needing to do it, in my free lectures.
Thanks John.
I watched them but must have forgotten. May rewatch them.
By the way, both here and in the lectures you describe everything so clearly, but my revision kit (Kaplan) makes the same method look much more complicated/confusing than it actually is.
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