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Sir
In the first bit of the question (a) I don’t understand how the components equity beta is calculated based on the capital structure of Tisa Co. The debt and equity component of the component can be found from the information provided in the question, so why can’t we use that capital structure?I am not sure which bit of section (a) you are referring to.
The asset beta for the new component will be the same as the asset beta for the component production of Elfu, and for this we have to use Elfu’s capital structure in the asset beta formula, which is what the answer has done.
Hi Sir,
Im confused why the solution is like this:1.217 = component asset beta x 0.25 + 1•078 x 0.75
Cant we do (1.217*0.25)+(1.078*0.75)?
This is where i’m going wrong..
1.217 is the overall asset beta for Elfu which is the beta for all of its activities – both production of the component and also its ‘other activities’.
As I explain in my free lectures, the overall beta (here 1.217) is equal to the weighted average of the betas of the separate activities (here ‘component production’, which is what we need to calculate, and ‘other activities’ for which the beta is 1.25).
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