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Hi sir,
I have two doubts here. For the past year question titled above, why part a) in arriving the component asset beta we need to times 0.25 and 0.75 with 1.078?My second question is on part b), using trial n error approach can we use 20% to get IRR instead of 12.75% as given in suggested answer? Will it be more accurate as the NPV found using 20% is closer to zero, compare with the use of 17.5%?
Thanks sir
The overall beta is the weighted average of the individual betas.
The question says that 75% of the equity is ‘other activities’ and therefore 25% is component production. So the ‘total’ beta is the weighted average of the two.With regard to the IRR, you can use any two ‘guesses’. Using different guesses will give slightly different answers, but would still get full marks.
However it makes sense to use 12.75% as one of the guesses simply because you need to discount at 12.75% when calculating the MIRR – so it saves time if you use this for one of the guesses for IRR as well.The free lectures on both of these topics will help you.
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