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Dear sir,
(1)
In Tisa Co, when finding the value of equity for both Tisa Co and Elfu Co, why is it that it doesn’t divide by the par value of the share?Tisa Co:
MVe = 10m shares x $1.80; instead of (10m shares/$0.5) x $1.80Elfu Co:
MVe = 400m shares x $3.20; instead of (400m shares/$0.25) x $1.80(2)
When finding the beta of Elfu Co, it said “80% of Elfu’s debt finance and 75% of Elfu’s Co equity finance can be attributed to other activities…..”Why is it that in the answers they only used the 0.75 (75%) and did not consider the 80% of debt at all?
1. Tisa has 10 million shares and since the market value is 180c per share, the total market value is 10m x $1.80.
The nominal/par value would only be relevant if instead of being told the number of shares you were told the total value of the share capital in the SOFP. Since the value in the SOFP is always the total nominal value, then it would be 10m x $0.50 (and in that case you would need to divide the total by $0.50 to find out the number of shares).
The same logic applies to Elf.2. It is because it is the equity that is carrying the risk.
1. I have come to my senses after a good night’s sleep now. Thank you!
2. I see. Since in calculating beta, we always assume the beta of debt = 0 (assuming no risk for debt), do we have to specifically write that assumption down in our calculations?
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