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In the answer,
1) hwo do you know BBS stores business can be divided into retail and property?
2) where can you find that the Beta of property portion is 0.625?
3) why the Vp is 1,231 under both options?
4) Does Vd only refer to the debt not the liabilities?Thanks a lot!
I’m recalling this off my memory so it may not be that accurate.
1. It should be mentioned somewhere in the question. That’s why P4 is so darn difficult, you need to be real sharp to catch things like these.
2. take the industry’s. You’re given the gearing and the industry’s Beta asset.
3. Sorry really cant recall this.
4. Yes it’s debt. Things like provisions are not included.
The BBS Stores equity beta is currently 1·824. A representative portfolio of commercial property companies has an equity beta of 1·25 and an average market gearing (adjusted for tax) of 50%.
This information in question gives us clue that BBS stores has two different type of assets have two different equity beta..one for retail (stores is assumed to do retail business) and commercial property generating different return from its main business of retail..
if you degear proxy equity beta of commercial property of 1.25 using average tax adjusted market gearing ,you would get asset beta equal to 0.625..remember the formula is asset beta = equity beta*(1-w’d) where w’d is tax adjusted market gearing which is given in question so 1.25(1-0.5)=0.625.
i didn’t understand your third question..
Vd means debt which is long and medium term financial liabilities…Thanks guys!
But in the answer, when caculating asset beta, 1231 is used to refer the value of property. I do not know why?
Just did the question today, can now answer your 3rd question.
It’s used to calculate the new combined asset beta because 1,231 is the remaining value of the property section of the business.
Before the reconstruction, your property portfolio value is
= value of landbuilding + value of assets under construction
= 2297+165
=2462Since 50% of each category was disposed during the restructuring, the balance of the portfolio is also 50%, i.e. 1231.
Vr is hence the residual.
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sorry may i ask why is fixture, fitting and equipment of $1,588m ignored from the property portfolio reconstruction calculation above?
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that’s alright zigot. Is there anyone else who can help me with this? Thanks.
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The questions says “50% of property portfolio(land and buildings) and 50% of assets under construction will be sold”. That’s why fixtures and equipment are excluded from the calculation.
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