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Hi. I don’t understand the answer in part (b). To find WACC of Poynins Co, first we take equity beta of Newimber Co and ungear it. My question is that how to find asset beta of Poynins Co using asset beta of Newimber Co? Why we have to divide 0.4?
As. I explain in my free lectures, when a company is made up of two separate types of business (here clothing division and sportswear division) the overall beta of the company is the weighted average of the betas of the individual divisions.
Here the overall beta is 1.10. The clothing division has a beta of 1.21 and comprises 60% of the business. We want the beta of the sportswear division and this comprises 40% of the business.
Therefore if the beta of sportswear is X,
then (0.6 x 1.21) + (0.4 x X) = 1.10
so, 0.726 + 0.4X = 1.10
0.4X = 0.374X = 0.935
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