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Good day I have two questions.
Why was the post tax interest(5.63) used in the YTM calculation?
Can you explain the beta Asset calculation of 0.77?
First question:
I contacted the examiner about your first question because although the arithmetic is correct, it is labelled wrongly in the answer (and the examiner confirmed this 🙂 ).
The calculation is not calculating the yield to maturity but is calculating the cost of debt. It is the cost of debt that is needed for the calculation of WACC and it has been done correctly by calculating the IRR of the after tax flows.
(The examiner says that would also accept a calculation of the YTM (using the pre-tax flows) and then using YTM(1-T) as the cost of debt in the calculation of the WACC. This obviously gives a slightly different answer but would still get full marks.)
Second question:
As I explain in my free lectures on CAPM, when two streams with different betas are combined, then the overall beta is the weighted average of the individual betas.
Here we know from the question the asset beta of the outdoor retail sector. We also know from the question the equity beta of the garden centre and so can calculate the asset beta of the garden centre.
To calculate the overall asset beta we then calculate a weighted average, weighting the betas by the book values of 60m and 150m (as indicated by the questions.
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