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Please explain why in MJ23 Q1bi , to calculate equity beta, the answer: 0.97*(1+(1-0.18)*0.3/0.7) = 1.31
I think the answer should be : 0.97*(0.7+(1-0.18)*0.3/0.7) = 1.01
Per question, debt/equity ratio is 30:70, hence Ve should be 0.7 instead of 1 ?The answer is correct. Because we know the asset beta we need to use the formula ‘backwards’ in order to calculate the equity beta.
Ba = (Ve / (Ve + Vd(1-t)) x Be
So Be = Ba x (Ve + Vd(1-T) / Ve
So Be = Be x (1 + (Vd(1-T)/Ve))
It is my last line that the examiners answer has used 🙂
I understand, actually, my answer should be : 0.97*(0.7+(1-0.18)*0.3)/0.7) = 1.31
Just add “)” after 0.3.
Thank you.
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