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Sir I have a question in part b (i) of this question,after the first directors proposal if assets are reduced by 30% so when calculating the equity beta of travel services why are we not taking 70% of $360million .. I mean if NCAs are reduced the equity might as well be apportioned?
The market value of the equity is not dependent on the book value of assets – it depends on the expected future earnings and these are not affected by the value of the assets in the SOFP.
sir can u also explain how have they calculated the value of debt as 190 million in after the second director’s proposal??
I mean why are they not finding the pv of debt of 120million using the new cost of debt of 6.2% and then adding it to 70 million?
Effectively that is what the answer is doing. However, since the coupon rate is 6.2%, then discounting at 6.2% will give a PV equal to the nominal value – try discounting and you will see that you get 120M.
oh yes got that but the answer was slightly higher than 120 so I got confused thanks…sir can I ask why are we then not discounting 70million of debt for 4 years??
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