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Good day John,
In the practise and revision kit for the Sept 2019 to June 2020 exam, question14 (Tisa) please explain to me how they calculate the Equity Beta of only the Production of the two components and not the whole business. I fully understood the question but because I could not come pass the Equity beta calculation, I would not have came to the correct answer.
Regards,
As I explain in my free lectures on CAPM, when two streams are combined then the overall beta is the weighted average of the individual betas.
We use the asset beta formula to determine that the overall asset beta or Elfu is 1.217.
Similarly we use the asset beta formula to determine that the asset beta for ‘other activities’ is 1.078.
We know from the question that 25% of the equity is in component production and 75% is in other activities.
Therefore (0.75 x 1.078) + (0.25 x beta of components) = 1.217
Solving this equation gives us the asset beta of components and we then use the asset beta formula to calculate the equity beta of other activities.
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