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hi there
how the component asset beta in tisa question and hotel services asset beta coeden question is calculated ? tell me the concept do reply thankssThe concept is that when there are different parts of a business with different risks (and therefore different betas) then the total beta is the weighted average of the individual betas, weighted by the market values of the different parts of the business.
If you still have problems applying this to the questions, then do ask again.
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Hye. I am sorry but can you explain with the illustration here since i still didnt get it. for Tisa co. thank you sir 🙂
Suppose that a business has 400 invested in operations that have a beta of 1.2, and another 600 invested in operations that have a beta of 1.8.
The total value of the business is 1000 (400 + 600), and the overall beta (or average beta) for the whole business will be (400/1000 x 1.2) + (600/1000 x 1.8) = 1.56
(You can also use the same formula ‘backwards’. If you know the total beta (1.56) and you know the beta of one part of the business – then you can calculate the beta of the other part.
You will find more examples of doing this in Chapter 10 of the Course Notes (and the lectures that goes with it)
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Hye thank you so much. I already understand this yesterday and the courtesy you replying this made me more than happy. thank you 🙂
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In relation to this same question I am struggling with
1. Where did the 25% and 75% come from, or why did they use this weighting in the answer
2. Why was a multiplier effect used in doing the MIRR calculation, and not use the formula method, for the present value of the return phase.- Topics: 0
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In relation to this same question I am struggling with
1. Where did the 25% and 75% come from, or why did they use this weighting in the answer
2. Why was a multiplier effect used in doing the MIRR calculation, and not use the formula method, for the present value of the return phase.1. The question says that 75% is other activities (and so 25% must be component production)
2. The formula is used in the examiners answer.
He then shows an alternative way of getting the same figure, but there is no need to do it that way. (If you prefer to then fine – have a look at his article (it was the previous examiner, so about five years go – but it is rather a waste of time since the formula will always be sufficient for the marks)- Topics: 0
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Thank you very much<
So why wasn’t 80% to 20% of debt used instead of 75% to 25% of equity?- Topics: 0
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Ok. I understand. Thank you very much for your help. It means alot.
Regarding the beta calculation. Why the weighting (75:25) is applied to the asset beta, rather than the equity beta?
Because the equity betas are affected by the levels of gearing. We always have to weight the asset betas (unless the hearings are identical).
@johnmoffat said:
1. The question says that 75% is other activities (and so 25% must be component production)Sir, question says – “It can be assumed that 80% of Elfu Co’s debt finance and
75% of Elfu Co’s equity finance can be attributed to other activities excluding the component production.”Other questions say directly e.g. – “75% of the activity of XXX company relate to XXX business”.
so me question is:
If I hear – 75% equity finance can be attributed to XXX activities – should i always assume that it relate to a weight?
My confusion is why question says that in a strange manner – “75% of Elfu Co’s equity finance”? What is the theoretical reason behind that? Activity can be financed partly by debt partly by equity – why only equity is accounted for in that question?
Thank you
It is confusing and I am not sure that it was terribly fair of the examiner.
However, the basis for his assumption is that it is equity (and not debt) that takes on the risk.
Hi Sir,
I am comfused on the answer of Coeden CO.
As the non current liabilities is redeemable bond 5.2%, why when calculate the market value of debt, the interest 5.2 no need deduct the tax (5.2*0.7/1.049)?
in the formulate WACC, the kd part , kd (1-T) should only be used for irredeemable loan, am i correct?
Why in this question, the answer used kd (1-t) in WACC?
The market value of debt is determined by the investors and is there based on the full interest – inventors do not get the benefit of tax relief. Again, I do explain this in full in my free lectures.
Usually, for redeemable debt we need to calculate the IRR. However, because the redemption is at par and the market value is almost at par, the IRR will be virtually the same as Kd(1-t) (try it and you will see what I mean 🙂 )
“The market value of debt is determined by the investors and is there based on the full interest – inventors do not get the benefit of tax relief. ”
—–i understand this concept. but in this case, 5.2% redeemable bonds is the liabilities of Coeden Con, so Coeden Co is NOT the investor, so Coeden should be able to enjo the tax relief benefit, correct? that why i confused why when calculate the market value of debt, the interest 5.2 no need deduct the tax (5.2*0.7/1.049)?
It is not Coeden who determines the market value – it is the investors.
Tax is only relevant when calculating the cost of debt to the company.
Again, I do suggest that you watch my lectures on the valuation of securities.
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