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Loki plc is a growing company specialising in making accessories for mobile phones and
tablets. The company is currently all?equity financed with 2 million ordinary shares in issue.
The existing shareholders are mainly family members and friends
Q plc, a listed company with similar business activities to Loki has a P/E ratio of 9, an equity
beta of 1.2 and gearing, measured as Debt:Equity of 1:2. Loki is expected to grow faster
than Q plc, at least in the short term
required (b) Calculate the value of Loki plc’s equity beta to 2 dpanswer;0.89 they hav just degeared it and found answer ,y dnt we regear it…they have given reason below for not regearing it but i dint understand y ?can u make it bit more clear sir??
Loki is all equity financed, then this is also Loki’s equity beta – no ‘regearing’ is
required.The beta of equity measures the total risk of the share, including the gearing risk.
The only reason for the equity beta being higher than the asset beta is because of the gearing in the company. If there is no gearing then the equity beta is equal to the asset beta.
Have you not watched my free lectures on CAPM, because I do explain all of this in the lectures 🙂
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.ohhh thank you sir!!! :))
no sir i havent watched your lectures,i had coaching in my college and now i dont have time to watch everything 🙂
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