KAPLAN STUDY TEXT WORKED EXAMPLE PAGE 476 CHAPTER 13

Mmisbahkiran7y ago

i am confused about asset beta and equity beta calculation.. i saw lecture and the steps i followed was to un geared asset beta of webb co which gave me answer of 1.28 (80/100*1.6) assume that tax rate is only for combined entity only as mentioned in question. then i calculated equity beta which turned out to be 450/500*Be=1.28 Be=1.42 and then Ke =.03+1.42(.058-.03)=.811 then WACC calculated = 450/500*.811+50/500*.05*.7=.7335 so cash flow of combined will be discounted at this rate or im totally wrong in my concept and i need to follow kaplan... free cash flow of webb co 10m/.7335=13.63

TThanh7y ago#1

Hi, dont have time to truly try to understand your question. But judging from the answer using CAPM you may have put in the numbers incorrectly in the calculator. 81% should not be returned from that. Answer should be below 8% = 0.08 Even if it was correct, this is an extremely high cost and in practice i dont think it will be sustainable.