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Hi jhon
I have doubt regarding the arriving at the book value of the debt if the first directors proposal is implemented
Like why 120m×0.2?? What’s the logic behind that
2) asset beta of travels services calculation…I didn’t get that step could you please elaborate emphasizing on divided by 70% …
Thank you in advance1. The second paragraph of the first directors proposal in the question says that they will pay off 80% of the long-term debt. Therefore the amount remaining is 20% of the existing long-term debt of 120,000.
2. As I explain in my free lectures on CAPM, the total beta of the company currently is the weighted average of the individual betas – that of repairs and maintenance and that of travel service.
The question says that the value of the non-current assets will reduce by 30%, so the value of travel services must be 70%.
Therefore 0.94 (the asset beta at the moment) = 30% x 0.65 (the beta of repairs) + 70% x the beta of travel.Therefore the beta of travel = (0.94 – 0.195) / 0.70 = 1.06
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