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If the first director’s proposal is implemented
In the process of Asset beta of travel services = [0·94 – (0·65 x 30%)]/70% = 1·06
this formula makes me confused. i know 0.94 is the asset beta for Morada Co? but what is 30% and 70% and i do not understand the whole formulacould you please explain it to me thanks!
When 2 streams (travel business and repairs business) are combined, then the total beta is the weighted average of the 2 separate betas.
0.94 is the total beta, 0.65 is the beta of repairs, and 30% and 70% are the proportions in each of the two streams.
I do suggest you watch my free lectures on CAPM, because this is all explained in the lectures.
What about the impact of changed credit rating on the old debt?…Why is that not taken into account?…the 120 million ild debt can also be afffected by the changed credit rating. But why dont we account for that in the earning calculation?
I am trying to relate this to Ennea (6/12) question.
The existing debt has obviously already been issued, and therefore the actual interest payable each year remains fixed.
Certainly the investors required rate of return stands to change, but this will be reflected in the market value of the debt, not in the amount of interest payable each year.
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